UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter ended March 31, 2018
Commission File Number 1-35746
Bryn Mawr Bank Corporation
(Exact name of registrant as specified in its charter)
Pennsylvania |
23-2434506 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer identification No.) |
801 Lancaster Avenue, Bryn Mawr, Pennsylvania |
19010 |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code (610) 525-1700
Not Applicable
Former name, former address and fiscal year, if changed since last report.
Indicate by checkmark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act..
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Classes |
Outstanding at May 1, 2018 |
|
Common Stock, par value $1 |
20,232,714 |
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED March 31, 2018
PART I - |
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ITEM 1. |
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Page 3 |
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Page 8 |
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ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Page 43 |
ITEM 3. |
Page 60 |
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ITEM 4. |
Page 60 |
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PART II - |
Page 61 |
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ITEM 1. |
Page 61 |
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ITEM 1A. |
Page 61 |
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ITEM 2. |
Page 61 |
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ITEM 3. |
Page 61 |
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ITEM 4. |
Page 61 |
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ITEM 5. |
Page 61 |
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ITEM 6. |
Page 62 |
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets - Unaudited
March 31, |
December 31, |
|||||||
(dollars in thousands) |
2018 |
2017 |
||||||
Assets |
||||||||
Cash and due from banks |
$ | 7,804 | $ | 11,657 | ||||
Interest bearing deposits with banks |
24,589 | 48,367 | ||||||
Cash and cash equivalents |
32,393 | 60,024 | ||||||
Investment securities available for sale, at fair value (amortized cost of $544,428 and $692,824 as of March 31, 2018 and December 31, 2017 respectively) |
534,103 | 689,202 | ||||||
Investment securities held to maturity, at amortized cost (fair value of $7,629 and $7,851 as of March 31, 2018 and December 31, 2017, respectively) |
7,885 | 7,932 | ||||||
Investment securities, trading |
8,211 | 4,610 | ||||||
Loans held for sale |
5,522 | 3,794 | ||||||
Portfolio loans and leases, originated |
2,564,827 | 2,487,296 | ||||||
Portfolio loans and leases, acquired |
740,968 | 798,562 | ||||||
Total portfolio loans and leases |
3,305,795 | 3,285,858 | ||||||
Less: Allowance for originated loan and lease losses |
(17,570 | ) | (17,475 | ) | ||||
Less: Allowance for acquired loan and lease losses |
(92 | ) | (50 | ) | ||||
Total allowance for loans and lease losses |
(17,662 | ) | (17,525 | ) | ||||
Net portfolio loans and leases |
3,288,133 | 3,268,333 | ||||||
Premises and equipment, net |
54,986 | 54,458 | ||||||
Accrued interest receivable |
12,521 | 14,246 | ||||||
Mortgage servicing rights |
5,706 | 5,861 | ||||||
Bank owned life insurance |
56,946 | 56,667 | ||||||
Federal Home Loan Bank stock |
15,499 | 20,083 | ||||||
Goodwill |
182,200 | 179,889 | ||||||
Intangible assets |
25,087 | 25,966 | ||||||
Other investments |
11,720 | 12,470 | ||||||
Other assets |
59,464 | 46,185 | ||||||
Total assets |
$ | 4,300,376 | $ | 4,449,720 | ||||
Liabilities |
||||||||
Deposits: |
||||||||
Non-interest-bearing |
$ | 863,118 | $ | 924,844 | ||||
Interest-bearing |
2,452,421 | 2,448,954 | ||||||
Total deposits |
3,315,539 | 3,373,798 | ||||||
Short-term borrowings |
173,704 | 237,865 | ||||||
Long-term FHLB advances |
107,784 | 139,140 | ||||||
Subordinated notes |
98,448 | 98,416 | ||||||
Junior subordinated debentures |
21,456 | 21,416 | ||||||
Accrued interest payable |
4,814 | 3,527 | ||||||
Other liabilities |
45,570 | 47,439 | ||||||
Total liabilities |
3,767,315 | 3,921,601 | ||||||
Shareholders' equity |
||||||||
Common stock, par value $1; authorized 100,000,000 shares; issued 24,438,758 and 24,360,049 shares as of March 31, 2018 and December 31, 2017, respectively, and outstanding of 20,229,896 and 20,161,395 as of March 31, 2018 and December 31, 2017, respectively |
24,439 | 24,360 | ||||||
Paid-in capital in excess of par value |
371,319 | 371,486 | ||||||
Less: Common stock in treasury at cost - 4,208,862 and 4,198,654 shares as of March 31, 2018 and December 31, 2017, respectively |
(68,787 | ) | (68,179 | ) | ||||
Accumulated other comprehensive loss, net of tax |
(9,664 | ) | (4,414 | ) | ||||
Retained earnings |
216,438 | 205,549 | ||||||
Total Bryn Mawr Bank Corporation shareholders' equity |
533,745 | 528,802 | ||||||
Noncontrolling interest |
(684 | ) | (683 | ) | ||||
Total shareholders' equity |
533,061 | 528,119 | ||||||
Total liabilities and shareholders' equity |
$ | 4,300,376 | $ | 4,449,720 |
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income - Unaudited
Three Months Ended March 31, |
||||||||
2018 |
2017 |
|||||||
(dollars in thousands, except per share data) |
||||||||
Interest income: |
||||||||
Interest and fees on loans and leases |
$ | 40,689 | $ | 28,482 | ||||
Interest on cash and cash equivalents |
53 | 66 | ||||||
Interest on investment securities: |
||||||||
Taxable |
2,706 | 1,623 | ||||||
Non-taxable |
84 | 110 | ||||||
Dividends |
2 | 45 | ||||||
Total interest income |
43,534 | 30,326 | ||||||
Interest expense: |
||||||||
Interest on deposits |
3,472 | 1,828 | ||||||
Interest on short-term borrowings |
630 | 27 | ||||||
Interest on FHLB advances and other borrowings |
562 | 698 | ||||||
Interest on subordinated notes |
1,143 | 370 | ||||||
Interest on junior subordinated debentures |
288 | - | ||||||
Total interest expense |
6,095 | 2,923 | ||||||
Net interest income |
37,439 | 27,403 | ||||||
Provision for loan and lease losses |
1,030 | 291 | ||||||
Net interest income after provision for loan and lease losses |
36,409 | 27,112 | ||||||
Noninterest income: |
||||||||
Fees for wealth management services |
10,308 | 9,303 | ||||||
Insurance commissions |
1,693 | 763 | ||||||
Capital markets revenue |
666 | - | ||||||
Service charges on deposits |
713 | 647 | ||||||
Loan servicing and other fees |
686 | 503 | ||||||
Net gain on sale of loans |
518 | 629 | ||||||
Net gain on sale of investment securities available for sale |
7 | 1 | ||||||
Net gain on sale of other real estate owned ("OREO") |
176 | - | ||||||
Dividends on FHLB and FRB stock |
431 | 214 | ||||||
Other operating income |
4,338 | 1,167 | ||||||
Total noninterest income |
19,536 | 13,227 | ||||||
Noninterest expenses: |
||||||||
Salaries and wages |
15,982 | 12,450 | ||||||
Employee benefits |
3,708 | 2,489 | ||||||
Occupancy and bank premises |
3,050 | 2,526 | ||||||
Furniture, fixtures, and equipment |
1,898 | 1,974 | ||||||
Advertising |
461 | 386 | ||||||
Amortization of intangible assets |
879 | 693 | ||||||
Due diligence, merger-related and merger integration expenses |
4,319 | 511 | ||||||
Professional fees |
748 | 711 | ||||||
Pennsylvania bank shares tax |
473 | 664 | ||||||
Information technology |
1,195 | 874 | ||||||
Other operating expenses |
3,317 | 3,382 | ||||||
Total noninterest expenses |
36,030 | 26,660 | ||||||
Income before income taxes |
19,915 | 13,679 | ||||||
Income tax expense |
4,630 | 4,635 | ||||||
Net income |
$ | 15,285 | $ | 9,044 | ||||
Add: Net loss attributable to noncontrolling interest |
1 | - | ||||||
Net income attributable to Bryn Mawr Bank Corporation |
$ | 15,286 | $ | 9,044 | ||||
Basic earnings per common share |
$ | 0.76 | $ | 0.53 | ||||
Diluted earnings per common share |
$ | 0.75 | $ | 0.53 | ||||
Dividends declared per share |
$ | 0.22 | $ | 0.21 | ||||
Weighted-average basic shares outstanding |
20,202,969 | 16,954,132 | ||||||
Dilutive shares |
247,525 | 228,557 | ||||||
Adjusted weighted-average diluted shares |
20,450,494 | 17,182,689 |
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income - Unaudited
(dollars in thousands) |
Three Months Ended March 31, |
|||||||
2018 |
2017 |
|||||||
Net income attributable to Bryn Mawr Bank Corporation |
$ | 15,286 | $ | 9,044 | ||||
Other comprehensive (loss) income: |
||||||||
Net change in unrealized (losses) gains on investment securities available for sale: |
||||||||
Net unrealized (losses) gains arising during the period, net of tax (benefit) expense of $(1,319) and $208, respectively |
(4,961 | ) | 388 | |||||
Reclassification adjustment for net (gain) on sale realized in net income, net of tax (expense) benefit of $(1) and $0, respectively |
(6 | ) | (1 | ) | ||||
Reclassification adjustment for net (gain) realized on transfer of investment securities available for sale to trading, net of tax (expense) benefit of $(88) and $0, respectively |
(329 | ) | - | |||||
Unrealized investment (losses) gains, net of tax (benefit) expense of $(1,408) and $208, respectively |
(5,296 | ) | 387 | |||||
Net change in unfunded pension liability: |
||||||||
Change in unfunded pension liability related to unrealized loss, prior service cost and transition obligation, net of tax expense of $12 and $17, respectively |
46 | 32 | ||||||
Total other comprehensive (loss) income |
(5,250 | ) | 419 | |||||
Total comprehensive income |
$ | 10,036 | $ | 9,463 |
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows - Unaudited
(dollars in thousands) |
Three Months Ended March 31, |
|||||||
2018 |
2017 |
|||||||
Operating activities: |
||||||||
Net income attributable to Bryn Mawr Bank Corporation |
$ | 15,286 | $ | 9,044 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan and lease losses |
1,030 | 291 | ||||||
Depreciation of fixed assets |
1,493 | 1,392 | ||||||
Net amortization of investment premiums and discounts |
761 | 673 | ||||||
Net gain on sale of investment securities available for sale |
(7 | ) | (1 | ) | ||||
Net gain on sale of loans |
(518 | ) | (629 | ) | ||||
Stock based compensation |
620 | 484 | ||||||
Amortization and net impairment of mortgage servicing rights |
171 | 172 | ||||||
Net accretion of fair value adjustments |
(3,004 | ) | (795 | ) | ||||
Amortization of intangible assets |
879 | 693 | ||||||
Net gain on sale of OREO |
(176 | ) | - | |||||
Net increase in cash surrender value of bank owned life insurance ("BOLI") |
(279 | ) | (200 | ) | ||||
Other, net |
(17,436 | ) | (6,380 | ) | ||||
Loans originated for resale |
(19,534 | ) | (26,064 | ) | ||||
Proceeds from loans sold |
18,265 | 33,023 | ||||||
Provision for deferred income taxes |
656 | 167 | ||||||
Change in income taxes payable/receivable |
3,819 | 4,324 | ||||||
Change in accrued interest receivable |
1,725 | 141 | ||||||
Change in accrued interest payable |
1,287 | (12 | ) | |||||
Net cash provided by operating activities |
5,038 | 16,323 | ||||||
Investing activities: |
||||||||
Purchases of investment securities available for sale |
(74,029 | ) | (42,842 | ) | ||||
Purchases of investment securities held to maturity |
- | (2,335 | ) | |||||
Proceeds from maturity and paydowns of investment securities available for sale |
218,393 | 217,539 | ||||||
Proceeds from maturity and paydowns of investment securities held to maturity |
39 | 15 | ||||||
Proceeds from sale of investment securities available for sale |
7 | 65 | ||||||
Net change in FHLB stock |
4,584 | 8,800 | ||||||
Proceeds from calls of investment securities |
65 | 1,134 | ||||||
Net change in other investments |
500 | (89 | ) | |||||
Purchase of domain name |
- | (152 | ) | |||||
Net portfolio loan and lease originations |
(21,230 | ) | (20,108 | ) | ||||
Purchases of premises and equipment |
(2,063 | ) | (162 | ) | ||||
Proceeds from sale of OREO |
217 | 39 | ||||||
Net cash provided by investing activities |
126,483 | 161,904 | ||||||
Financing activities: |
||||||||
Change in deposits |
(57,879 | ) | 56,909 | |||||
Change in short-term borrowings |
(64,161 | ) | (180,538 | ) | ||||
Dividends paid |
(4,523 | ) | (3,559 | ) | ||||
Change in long-term FHLB advances |
(31,371 | ) | (15,000 | ) | ||||
Cash payments to taxing authorities on employees' behalf from shares withheld from stock-based compensation |
(626 | ) | (19 | ) | ||||
Net sale of treasury stock for deferred compensation plans |
171 | - | ||||||
Repurchase of warrants from U.S. Treasury |
(1,755 | ) | - | |||||
Proceeds from exercise of stock options |
992 | 650 | ||||||
Net cash used in financing activities |
(159,152 | ) | (141,557 | ) | ||||
Change in cash and cash equivalents |
(27,631 | ) | 36,670 | |||||
Cash and cash equivalents at beginning of period |
60,024 | 50,765 | ||||||
Cash and cash equivalents at end of period |
$ | 32,393 | $ | 87,435 | ||||
Supplemental cash flow information: |
||||||||
Cash paid during the year for: |
||||||||
Income taxes |
$ | 146 | $ | 117 | ||||
Interest |
$ | 4,808 | $ | 2,935 | ||||
Non-cash information: |
||||||||
Change in other comprehensive loss |
$ | (5,250 | ) | $ | 419 | |||
Change in deferred tax due to change in comprehensive income |
$ | (1,396 | ) | $ | 225 | |||
Transfer of loans to other real estate owned and repossessed assets |
$ | 37 | $ | - |
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes In Shareholders’ Equity - Unaudited
(dollars in thousands, except per share data)
For the Three Months Ended March 31, 2018 |
||||||||||||||||||||||||||||||||
Shares of Common Stock Issued |
Common Stock |
Paid-in Capital |
Treasury Stock |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Noncontrolling Interest |
Total Shareholders' Equity |
|||||||||||||||||||||||||
Balance December 31, 2017 |
24,360,049 | $ | 24,360 | $ | 371,486 | $ | (68,179 | ) | $ | (4,414 | ) | $ | 205,549 | $ | (683 | ) | $ | 528,119 | ||||||||||||||
Net income attributable to Bryn Mawr Bank Corporation |
- | - | - | - | - | 15,286 | - | 15,286 | ||||||||||||||||||||||||
Net loss attributable to noncontrolling interest |
- | - | - | - | - | - | (1 | ) | (1 | ) | ||||||||||||||||||||||
Dividends declared, $0.22 per share |
- | - | - | - | - | (4,495 | ) | - | (4,495 | ) | ||||||||||||||||||||||
Other comprehensive loss, net of tax expense of $1,396 |
- | - | - | - | (5,250 | ) | - | - | (5,250 | ) | ||||||||||||||||||||||
Stock based compensation |
- | - | 620 | - | - | - | - | 620 | ||||||||||||||||||||||||
Net purchase of treasury stock from stock awards for statutory tax withholdings |
- | - | - | (626 | ) | - | - | - | (626 | ) | ||||||||||||||||||||||
Net sale of treasury stock for deferred compensation trusts |
- | - | 153 | 18 | - | - | - | 171 | ||||||||||||||||||||||||
Repurchase of warrants from U.S. Treasury |
- | - | (1,853 | ) | - | - | 98 | - | (1,755 | ) | ||||||||||||||||||||||
Common stock issued: |
||||||||||||||||||||||||||||||||
Common stock issued through share-based awards and options exercises |
78,709 | 79 | 913 | - | - | - | - | 992 | ||||||||||||||||||||||||
Balance March 31, 2018 |
24,438,758 | $ | 24,439 | $ | 371,319 | $ | (68,787 | ) | $ | (9,664 | ) | $ | 216,438 | $ | (684 | ) | $ | 533,061 |
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The Unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In the opinion of Bryn Mawr Bank Corporation’s (the “Corporation”) management, all adjustments necessary for a fair presentation of the consolidated financial position and the results of operations for the interim periods presented have been included. These Unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto in the Corporation’s Annual Report on Form 10-K for the twelve months ended December 31, 2017 (the “2017 Annual Report”).
The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the full year.
Principles of Consolidation
The Unaudited Consolidated Financial Statements include the accounts of the Corporation and its wholly owned subsidiaries; the Corporation’s primary subsidiary is the Bank. In connection with the RBPI Merger (defined in Note 3 – Business Combinations below), the Corporation acquired two Delaware trusts, Royal Bancshares Capital Trust I and Royal Bancshares Capital Trust II. These two entities are not consolidated per requirements under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation” (“ASC Topic 810”). All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current-year presentation.
Note 2 - Recent Accounting Pronouncements
The following Financial Accounting Standards Board ("FASB") Accounting Standards Updates ("ASUs") are divided into pronouncements which have been adopted by the Corporation since January 1, 2018, and those which are not yet effective and have been evaluated or are currently being evaluated by management as of March 31, 2018.
Adopted Pronouncements:
FASB ASU 2014-09 (Topic 606), “Revenue from Contracts with Customers”
The Corporation adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as other real estate owned (“OREO”). The majority of the Corporation’s revenues come from interest income and other sources, including loans, leases, investment securities and derivatives, that are outside the scope of ASC 606. The Corporation’s services that fall within the scope of ASC 606 are presented within noninterest income and are recognized as revenue as the Corporation satisfies its obligation to the customer. Services within the scope of ASC 606 include service charges on deposits, interchange income, wealth management fees, investment brokerage fees, and the net gain on sale of OREO. Refer to Note 17 Revenue from Contracts with Customers for further discussion on the Corporation’s accounting policies for revenue sources within the scope of ASC 606. The adoption of this ASU did not have an impact to our Consolidated Financial Statements.
FASB ASU 2017-01 (Topic 805), “Business Combinations”
The Corporation adopted ASU 2017-01, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The adoption of this ASU did not have a material impact on our Consolidated Financial Statements and related disclosures.
FASB ASU 2016-15 (Topic 320), “Classification of Certain Cash Receipts and Cash Payments”
The Corporation adopted ASU 2016-15, which provides guidance on eight specific cash flow issues and their disclosure in the consolidated statements of cash flows. The issues addressed include debt prepayment, settlement of zero-coupon debt, contingent consideration in business combinations, proceeds from settlement of insurance claims, proceeds from settlement of BOLI, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The adoption of this ASU did not have a material impact on our Consolidated Financial Statements and related disclosures.
FASB ASU 2016-01 (Subtopic 825-10), “Financial Instruments – Overall, Recognition and Measurement of Financial Assets and Financial Liabilities”
The Corporation adopted ASU 2016-01 which requires that equity investments be measured at fair value with changes in fair value recognized in net income. The Corporation’s equity investments with a readily determinable fair value are currently included within trading securities and are measured at fair value with changes in fair value recognized in net income. In connection with the adoption of this ASU, the Corporation elected the practicability exception to fair value measurement for investments in equity securities without a readily determinable fair value (other than our FHLB, FRB, and Atlantic Central Bankers Bank stock, which are outside of the scope of this ASU). Under the practicability exception, the investments are measured at cost, less impairment, plus or minus observable price changes (in orderly transactions) of an identical or similar investment of the same issuer. The adoption of this ASU did not have a material impact on our Consolidated Financial Statements.
FASB ASU 2017-07 – Compensation – Retirement Benefits (Topic 715): “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”
On January 1, 2018, the Corporation adopted ASU 2017-07 and all subsequent amendments to the ASU, which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory or a self-constructed asset).
Upon adoption, the components of net periodic benefit cost other than the service cost component were reclassified retrospectively from “Employee benefits” to “Other operating expenses” in the Consolidated Statements of Income. Since both “Employee benefits” and “Other operating expenses” line items of these income statement line items are within “Non-interest expenses”, there was no impact to total “Non-interest expenses” or “Net income.” The components of net periodic benefit cost are currently disclosed in Note 17 – “Pension and Postretirement Benefit Plans” in the Notes to Consolidated Financial Statements found in our 2017 Annual Report. Additionally, the Corporation does not currently capitalize any components of its net periodic benefit costs. The adoption of this ASU did not have a material impact on our Consolidated Financial Statements and related disclosures.
Pronouncements Not Yet Effective:
FASB ASU 2017-04 (Topic 350), “Intangibles – Goodwill and Others”
Issued in January 2017, ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for annual periods beginning after December 15, 2019 including interim periods within those periods. Management does not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements and related disclosures.
FASB ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments”
Issued in June 2016, ASU 2016-13 significantly changes how companies measure and recognize credit impairment for many financial assets. The new current expected credit loss (“CECL”) model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets that are in the scope of the standard. The ASU also makes targeted amendments to the current impairment model for available-for-sale debt securities. ASU 2016-13 is effective for the annual and interim periods in fiscal years beginning after December 15, 2019, with early adoption permitted. Adoption of this new guidance can be applied only on a prospective basis as a cumulative-effect adjustment to retained earnings.
It is expected that the new model will include different assumptions used in calculating credit losses, such as estimating losses over the estimated life of a financial asset, and will consider expected future changes in macroeconomic conditions. The adoption of this ASU may result in an increase to the Corporation’s allowance for credit losses, which will depend upon the nature and characteristics of the Corporation 's portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at the adoption date. The Corporation has engaged the services of a third-party consultant as well as invested in software designed to assist management in the development and implementation of the new CECL model. Management is currently in the process of validating historical data uploaded within the third-party software to replicate the current ALLL model. The adoption of this ASU will also require the addition of an allowance for held-to-maturity debt securities. The Corporation currently does not intend to early adopt this new guidance.
FASB ASU 2016-02 (Topic 842), “Leases”
Issued in February 2016, ASU 2016-02 revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. ASU 2016-02 is effective for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. The standard is required to be adopted using the modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Management has begun to inventory the Corporation’s various leases and is currently computing the lease liability and a right-of-use asset for all leases. Management is aware that the adoption of this ASU will impact the Corporation’s balance sheet for the recording of assets and liabilities for operating leases. Any additional assets recorded as a result of implementation will have a negative impact on the Corporation and Bank capital ratios under current regulatory guidance.
Note 3 - Business Combinations
Royal Bancshares of Pennsylvania, Inc.
On December 15, 2017, the previously announced merger of Royal Bancshares of Pennsylvania, Inc. (“RBPI”) with and into the Corporation (the “RBPI Merger”), and the merger of Royal Bank America with and into the Bank, as contemplated by the Agreement and Plan of Merger, by and between RBPI and the Corporation, dated as of January 30, 2017 (the “Agreement”) were completed. In accordance with the Agreement, the aggregate share consideration paid to RBPI shareholders consisted of 3,098,754 shares of the Corporation’s common stock. Shareholders of RBPI received 0.1025 shares of Corporation common stock for each share of RBPI Class A common stock and 0.1179 shares of Corporation common stock for each share of RBPI Class B common stock owned as of the effective date of the RBPI Merger, with cash-in-lieu of fractional shares totaling $7 thousand. Holders of in-the-money options to purchase RBPI Class A common stock received cash totaling $112 thousand. In addition, 1,368,040 warrants to purchase Class A common stock of RBPI, valued at $1.9 million, were converted to 140,224 warrants to purchase Corporation common stock. In accordance with the acquisition method of accounting, assets acquired and liabilities assumed were preliminarily adjusted to their fair values as of the date of the RBPI Merger. The excess of consideration paid above the fair value of net assets acquired was recorded as goodwill. This goodwill is not amortizable nor is it deductible for income tax purposes.
In connection with the RBPI Merger, the consideration paid and the estimated fair value of identifiable assets acquired and liabilities assumed as of the date of the RBPI Merger, which include the effects of any measurement period adjustments in accordance with ASC 805-10, are summarized in the following table:
(dollars in thousands) |
||||
Consideration paid: |
||||
Common shares issued (3,098,754) |
$ | 136,655 | ||
Cash in lieu of fractional shares |
7 | |||
Cash-out of certain options |
112 | |||
Fair value of warrants assumed |
1,853 | |||
Value of consideration |
$ | 138,627 | ||
Assets acquired: |
||||
Cash and due from banks |
$ | 17,092 | ||
Investment securities available for sale |
121,587 | |||
Loans |
567,308 | |||
Premises and equipment |
8,264 | |||
Deferred income taxes |
34,380 | |||
Bank-owned life insurance |
16,550 | |||
Core deposit intangible |
4,670 | |||
Favorable lease asset |
566 | |||
Other assets |
13,996 | |||
Total assets |
$ | 784,413 | ||
Liabilities assumed: |
||||
Deposits |
$ | 593,172 | ||
FHLB and other long-term borrowings |
59,568 | |||
Short-term borrowings |
15,000 | |||
Junior subordinated debentures |
21,416 | |||
Unfavorable lease liability |
322 | |||
Other liabilities |
31,381 | |||
Total liabilities |
$ | 720,859 | ||
Net assets acquired |
$ | 63,554 | ||
Goodwill resulting from acquisition of RBPI |
$ | 75,073 |
Provisional Estimates of Fair Value of Certain Assets Acquired in the RBPI Merger
As of March 31, 2018, the accounting for the estimates of fair value for certain loans acquired in the RBPI Merger is incomplete. The Corporation is in the process of obtaining new information that will allow management to better estimate fair values that existed as of December 15, 2017. When this information is obtained, management anticipates an adjustment to the provisional fair value assigned to certain acquired loans. These adjustments will result in corresponding adjustments to goodwill and net deferred tax asset. In accordance with ASC 805-10, the adjustments will be recorded in the period in which the new information about facts and circumstances that existed as of the acquisition date is obtained and reviewed.
During the three months ended March 31, 2018, the Corporation adjusted certain provisional fair value estimates related to the RBPI Merger. The following table details the changes in fair value of the net assets acquired and liabilities assumed as of December 15, 2017 from the amounts originally reported in the Corporation’s Form 10-K for the year ended December 31, 2017:
(dollars in thousands) |
||||
Goodwill resulting from the acquisition of RBPI reported as of December 31, 2017 |
$ | 72,762 | ||
Fair Value Adjustments: |
||||
Loans |
3,065 | |||
Other assets |
491 | |||
Deferred income taxes |
(1,245 |
) |
||
Total Fair Value Adjustments |
2,311 | |||
Goodwill from the acquisition of RBPI as of March 31, 2018 |
$ | 75,073 |
Methods Used to Fair Value Assets and Liabilities
For information regarding the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed, refer to Note 2 in the Notes to Consolidated Financial Statements in our 2017 Annual Report.
Loans held for investment
During the three months ended March 31, 2018, new information became available related to certain loans acquired from RBPI. This new information resulted in an adjustment to the fair value mark applied to the acquired loan portfolio. Adjustments were made to the fair value of loans acquired with evidence of credit quality deterioration. Loans meeting this definition were reviewed by comparing the contractual cash flows to expected collectible cash flows. The aggregate expected cash flows less the acquisition date fair value results in an accretable yield amount. The accretable yield amount will be recognized over the life of the loans or over the recovery period of the underlying collateral on a level yield basis as an adjustment to yield. As a result of the adjustments, the Corporation recorded a $3.0 million increase in nonaccretable difference. The adjustment to the aggregate expected cash flows less the acquisition date fair value resulted in an increase in accretable yield of $207 thousand.
The following table provides an updated summary of the acquired impaired loans and leases as of December 15, 2017, which include the effects of any measurement period adjustments in accordance with ASC 805-10, resulting from the RBPI Merger:
(dollars in thousands) |
||||
Contractually required principal and interest payments |
$ | 38,404 | ||
Contractual cash flows not expected to be collected (nonaccretable difference) |
(16,025 |
) |
||
Cash flows expected to be collected |
22,379 | |||
Interest component of expected cash flows (accretable yield) |
(2,526 |
) |
||
Fair value of loans acquired with deterioration of credit quality |
$ | 19,853 |
Harry R. Hirshorn & Company, Inc., d/b/a Hirshorn Boothby (“Hirshorn”)
The acquisition of Hirshorn, an insurance agency headquartered in the Chestnut Hill section of Philadelphia, was completed on May 24, 2017. Immediately after the acquisition, Hirshorn was merged into the Bank’s existing insurance subsidiary, BMT Insurance Advisors, Inc., formerly known as Powers Craft Parker and Beard, Inc (“PCPB”). The consideration paid by the Bank was $7.5 million, of which $5.8 million was paid at closing, with three contingent cash payments, not to exceed $575 thousand each, to be payable on each of May 24, 2018, May 24, 2019, and May 24, 2020, subject to the attainment of certain targets during the related periods. The acquisition enhanced the Bank’s ability to offer comprehensive insurance solutions to both individual and business clients and continues the strategy of selectively establishing specialty offices in targeted areas.
In connection with the Hirshorn acquisition, the following table details the consideration paid, the initial estimated fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition and the resulting goodwill recorded:
(dollars in thousands) |
||||
Consideration paid: |
||||
Cash paid at closing |
$ | 5,770 | ||
Contingent payment liability (present value) |
1,690 | |||
Value of consideration |
7,460 | |||
Assets acquired: |
||||
Cash operating accounts |
978 | |||
Intangible assets – trade name |
195 | |||
Intangible assets – customer relationships |
2,672 | |||
Intangible assets – non-competition agreements |
41 | |||
Premises and equipment |
1,795 | |||
Accounts receivable |
192 | |||
Other assets |
27 | |||
Total assets |
5,900 | |||
Liabilities assumed: |
||||
Accounts payable |
800 | |||
Other liabilities |
2 | |||
Total liabilities |
802 | |||
Net assets acquired |
5,098 | |||
Goodwill resulting from acquisition of Hirshorn |
$ | 2,362 |
As of December 31, 2017, the estimates of the fair value of identifiable assets acquired and liabilities assumed in the Hirshorn acquisition were final.
Pro Forma Income Statements (unaudited)
The following table presents the pro forma income statement of the combined institution (RBPI and the Corporation) for the three months ended March 31, 2017 as if the RBPI Merger had occurred on January 1, 2017. The pro forma income statement adjustments are limited to the effects of purchase accounting fair value mark amortization and accretion and intangible asset amortization. No cost savings or additional merger expenses have been included in the pro forma income statement. Due to the immaterial contribution to net income of the Hirshorn acquisition, which occurred during the year shown in the table, the pro forma effects of the Hirshorn acquisition have been excluded.
(dollars in thousands) |
Three Months Ended March 31, 2017 |
|||
Total interest income |
$ | 41,227 | ||
Total interest expense |
4,562 | |||
Net interest income |
36,665 | |||
Provision for loan and lease losses |
588 | |||
Net interest income after provision for loan and lease losses |
36,077 | |||
Total non-interest income |
13,738 | |||
Total non-interest expenses* |
32,295 | |||
Income before income taxes |
17,520 | |||
Income tax expense |
5,936 | |||
Net income |
$ | 11,584 | ||
Per share data**: |
||||
Weighted-average basic shares outstanding |
20,052,886 | |||
Dilutive shares |
256,176 | |||
Adjusted weighted-average diluted shares |
20,309,062 | |||
Basic earnings per common share |
$ | 0.58 | ||
Diluted earnings per common share |
$ | 0.57 |
* Total non-interest expense includes RBPI Net Income Attributable to Noncontrolling Interest and Preferred Stock Series A Accumulated Dividend and Accretion for pro forma presentation.
** Assumes that the shares of RBPI common stock outstanding as of December 31, 2017 were outstanding for the full three month period ended March 31, 2017.
Due Diligence, Merger-Related and Merger Integration Expenses
Due diligence, merger-related and merger integration expenses include consultant costs, investment banker fees, contract breakage fees, retention bonuses for severed employees, salary and wages for redundant staffing involved in the integration of the institutions and bonus accruals for members of the merger integration team. The following table details the costs identified and classified as due diligence, merger-related and merger integration costs for the periods indicated:
Three Months Ended March 31, |
||||||||
(dollars in thousands) |
2018 |
2017(1) |
||||||
Advertising |
$ | 59 | $ | — | ||||
Employee Benefits |
203 | — | ||||||
Occupancy and bank premises |
1,856 | — | ||||||
Furniture, fixtures, and equipment |
179 | — | ||||||
Information technology |
112 | — | ||||||
Professional fees |
747 | 396 | ||||||
Salaries and wages |
346 | 80 | ||||||
Other |
817 | 35 | ||||||
Total due diligence, merger-related and merger integration expenses |
$ | 4,319 | $ | 511 |
(1) Total due diligence, merger-related and merger integration expenses for the three months ended March 31, 2017 were primarily related to the acquisition of Hirshorn.
Note 4 - Investment Securities
The amortized cost and fair value of investment securities available for sale as of March 31, 2018 and December 31, 2017 are as follows:
As of March 31, 2018
(dollars in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
U.S. Treasury securities |
$ | 100 | $ | — | $ | — | $ | 100 | ||||||||
Obligations of the U.S. government and agencies |
178,863 | 34 | (3,790 |
) |
175,107 | |||||||||||
Obligations of state and political subdivisions |
19,992 | 8 | (83 |
) |
19,917 | |||||||||||
Mortgage-backed securities |
309,071 | 511 | (5,680 |
) |
303,902 | |||||||||||
Collateralized mortgage obligations |
35,302 | 2 | (1,324 |
) |
33,980 | |||||||||||
Other investment securities |
1,100 | — | (3 |
) |
1,097 | |||||||||||
Total |
$ | 544,428 | $ | 555 | $ | (10,880 |
) |
$ | 534,103 |
As of December 31, 2017
(dollars in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
U.S. Treasury securities |
$ | 200,077 | $ | 11 | $ | — | $ | 200,088 | ||||||||
Obligations of the U.S. government and agencies |
153,028 | 75 | (2,059 |
) |
151,044 | |||||||||||
Obligations of state and political subdivisions |
21,352 | 11 | (53 |
) |
21,310 | |||||||||||
Mortgage-backed securities |
275,958 | 887 | (1,855 |
) |
274,990 | |||||||||||
Collateralized mortgage obligations |
37,596 | 14 | (948 |
) |
36,662 | |||||||||||
Other investment securities |
4,813 | 318 | (23 |
) |
5,108 | |||||||||||
Total |
$ | 692,824 | $ | 1,316 | $ | (4,938 |
) |
$ | 689,202 |
The following tables present the aggregate amount of gross unrealized losses as of March 31, 2018 and December 31, 2017 on available for sale investment securities classified according to the amount of time those securities have been in a continuous unrealized loss position:
As of March 31, 2018
Less than 12 |
12 Months |
Total |
||||||||||||||||||||||
(dollars in thousands) |
Fair |
Unrealized Losses |
Fair |
Unrealized Losses |
Fair |
Unrealized Losses |
||||||||||||||||||
Obligations of the U.S. government and agencies |
$ | 128,699 | $ | (2,688 |
) |
$ | 26,389 | $ | (1,102 |
) |
$ | 155,088 | $ | (3,790 |
) |
|||||||||
Obligations of state and political subdivisions |
9,758 | (26 |
) |
2,122 | (57 |
) |
11,880 | (83 |
) |
|||||||||||||||
Mortgage-backed securities |
236,886 | (4,620 |
) |
29,840 | (1,060 |
) |
266,726 | (5,680 |
) |
|||||||||||||||
Collateralized mortgage obligations |
7,726 | (112 |
) |
25,143 | (1,212 |
) |
32,869 | (1,324 |
) |
|||||||||||||||
Other investment securities |
797 | (3 |
) |
— | — | 797 | (3 |
) |
||||||||||||||||
Total |
$ | 383,866 | $ | (7,449 |
) |
$ | 83,494 | $ | (3,431 |
) |
$ | 467,360 | $ | (10,880 |
) |
As of December 31, 2017
Less than 12 |
12 Months |
Total |
||||||||||||||||||||||
(dollars in thousands) |
Fair |
Unrealized Losses |
Fair |
Unrealized Losses |
Fair |
Unrealized Losses |
||||||||||||||||||
Obligations of the U.S. government and agencies |
$ | 114,120 | $ | (1,294 |
) |
$ | 26,726 | $ | (765 |
) |
$ | 140,846 | $ | (2,059 |
) |
|||||||||
Obligations of state and political subdivisions |
11,144 | (29 |
) |
2,709 | (24 |
) |
13,853 | (53 |
) |
|||||||||||||||
Mortgage-backed securities |
177,919 | (1,293 |
) |
31,787 | (562 |
) |
209,706 | (1,855 |
) |
|||||||||||||||
Collateralized mortgage obligations |
5,166 | (47 |
) |
26,686 | (901 |
) |
31,852 | (948 |
) |
|||||||||||||||
Other investment securities |
1,805 | (23 |
) |
— | — | 1,805 | (23 |
) |
||||||||||||||||
Total |
$ | 310,154 | $ | (2,686 |
) |
$ | 87,908 | $ | (2,252 |
) |
$ | 398,062 | $ | (4,938 |
) |
Management evaluates the Corporation’s investment securities that are in an unrealized loss position in order to determine if the decline in fair value is other than temporary. The investment portfolio includes debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state and local municipalities and other issuers. All fixed income investment securities in the Corporation’s investment portfolio are rated as investment-grade or higher. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, interest rates and the bond rating of each security. The unrealized losses presented in the tables above are temporary in nature and are primarily related to market interest rates rather than the underlying credit quality of the issuers or collateral. Management does not believe that these unrealized losses are other-than-temporary. Management does not have the intent to sell these securities prior to their maturity or the recovery of their cost bases and believes that it is more likely than not that it will not have to sell these securities prior to their maturity or the recovery of their cost bases.
As of March 31, 2018 and December 31, 2017, securities having a fair value of $121.6 million and $126.2 million, respectively, were specifically pledged as collateral for public funds, trust deposits, the FRB discount window program, Federal Home Loan Bank of Pittsburgh (“FHLB”) borrowings and other purposes. The FHLB has a blanket lien on non-pledged, mortgage-related loans and securities as part of the Corporation’s borrowing agreement with the FHLB.
The amortized cost and fair value of available for sale investment and mortgage-related securities available for sale as of March 31, 2018 and December 31, 2017, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
March 31, 2018 |
December 31, 2017 |
|||||||||||||||
(dollars in thousands) |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
||||||||||||
Investment securities: |
||||||||||||||||
Due in one year or less |
$ | 11,932 | $ | 11,922 | $ | 211,019 | $ | 211,019 | ||||||||
Due after one year through five years |
149,967 | 146,773 | 126,452 | 124,797 | ||||||||||||
Due after five years through ten years |
23,413 | 22,910 | 23,147 | 22,804 | ||||||||||||
Due after ten years |
14,743 | 14,616 | 15,439 | 15,421 | ||||||||||||
Subtotal |
200,055 | 196,221 | 376,057 | 374,041 | ||||||||||||
Mortgage-related securities(1) |
344,373 | 337,882 | 313,554 | 311,652 | ||||||||||||
Mutual funds with no stated maturity |
— | — | 3,213 | 3,509 | ||||||||||||
Total |
$ | 544,428 | $ | 534,103 | $ | 692,824 | $ | 689,202 |
(1) Expected maturities of mortgage-related securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The amortized cost and fair value of investment securities held to maturity as of March 31, 2018 and December 31, 2017 are as follows:
As of March 31, 2018
(dollars in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
Mortgage-backed securities |
$ | 7,885 | $ | — | $ | (256 |
) |
$ | 7,629 |
As of December 31, 2017
(dollars in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
Mortgage-backed securities |
$ | 7,932 | $ | 5 | $ | (86 |
) |
$ | 7,851 |
The following tables present the aggregate amount of gross unrealized losses as of March 31, 2018 and December 31, 2017 on held to maturity securities classified according to the amount of time those securities have been in a continuous unrealized loss position:
As of March 31, 2018
Less than 12 |
12 Months |
Total |
||||||||||||||||||||||
(dollars in thousands) |
Fair |
Unrealized Losses |
Fair |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
Mortgage-backed securities |
$ | 4,953 | $ | (143 |
) |
$ | 2,676 | $ | (113 |
) |
$ | 7,629 | $ | (256 |
) |
As of December 31, 2017
Less than 12 |
12 Months |
Total |
||||||||||||||||||||||
(dollars in thousands) |
Fair |
Unrealized Losses |
Fair |
Unrealized Losses |
Fair |
Unrealized Losses |
||||||||||||||||||
Mortgage-backed securities |
$ | 2,756 | $ | (25 |
) |
$ | 3,866 | $ | (61 |
) |
$ | 6,622 | $ | (86 |
) |
The amortized cost and fair value of held to maturity investment securities as of March 31, 2018 and December 31, 2017, by contractual maturity, are shown below:
March 31, 2018 |
December 31, 2017 |
|||||||||||||||
(dollars in thousands) |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
||||||||||||
Mortgage-backed securities(1) |
$ | 7,885 | $ | 7,629 | $ | 7,932 | $ | 7,851 |
(1) Expected maturities of mortgage-related securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
As of March 31, 2018 and December 31, 2017, the Corporation’s investment securities held in trading accounts totaled $8.2 million and $4.6 million, respectively, and consisted of deferred compensation trust accounts which are invested in listed mutual funds whose diversification is at the discretion of the deferred compensation plan participants and, as of March 31, 2018, a rabbi trust account established to fund certain unqualified pension obligations. Investment securities held in trading accounts are reported at fair value, with adjustments in fair value reported through income.
Note 5 - Loans and Leases
The loan and lease portfolio consists of loans and leases originated by the Corporation, as well as loans acquired in mergers and acquisitions. These mergers and acquisitions include the December 2017 RBPI Merger, the January 2015 Continental Bank Holdings, Inc. Merger, the November 2012 transaction with First Bank of Delaware, and the July 2010 acquisition of First Keystone Financial, Inc. Certain tables in this footnote are presented with a breakdown between originated and acquired loans and leases.
A. The table below details portfolio loans and leases as of the dates indicated:
March 31, 2018 |
December 31, 2017 |
|||||||||||||||||||||||
(dollars in thousands) |
Originated |
Acquired |
Total Loans and Leases |
Originated |
Acquired |
Total Loans and Leases |
||||||||||||||||||
Loans held for sale |
$ | 5,522 | $ | — | $ | 5,522 | $ | 3,794 | $ | — | $ | 3,794 | ||||||||||||
Real Estate Loans: |
||||||||||||||||||||||||
Commercial mortgage |
$ | 1,151,578 | $ | 389,879 | $ | 1,541,457 | $ | 1,122,327 | $ | 401,050 | $ | 1,523,377 | ||||||||||||
Home equity lines and loans |
178,624 | 32,845 | 211,469 | 183,283 | 34,992 | 218,275 | ||||||||||||||||||
Residential mortgage |
360,242 | 93,413 | 453,655 | 360,935 | 97,951 | 458,886 | ||||||||||||||||||
Construction |
135,480 | 66,688 | 202,168 | 128,266 | 84,188 | 212,454 | ||||||||||||||||||
Total real estate loans |
$ | 1,825,924 | $ | 582,825 | $ | 2,408,749 | $ | 1,794,811 | $ | 618,181 | $ | 2,412,992 | ||||||||||||
Commercial and industrial |
613,315 | 113,916 | 727,231 | 589,304 | 130,008 | 719,312 | ||||||||||||||||||
Consumer |
45,731 | 2,692 | 48,423 | 35,146 | 3,007 | 38,153 | ||||||||||||||||||
Leases |
79,857 | 41,535 | 121,392 | 68,035 | 47,366 | 115,401 | ||||||||||||||||||
Total portfolio loans and leases |
$ | 2,564,827 | $ | 740,968 | $ | 3,305,795 | $ | 2,487,296 | $ | 798,562 | $ | 3,285,858 | ||||||||||||
Total loans and leases |
$ | 2,570,349 | $ | 740,968 | $ | 3,311,317 | $ | 2,491,090 | $ | 798,562 | $ | 3,289,652 | ||||||||||||
Loans with fixed rates |
$ | 1,081,414 | $ | 473,855 | $ | 1,555,269 | $ | 1,034,542 | $ | 538,510 | $ | 1,573,052 | ||||||||||||
Loans with adjustable or floating rates |
1,488,935 | 267,113 | 1,756,048 | 1,456,548 | 260,052 | 1,716,600 | ||||||||||||||||||
Total loans and leases |
$ | 2,570,349 | $ | 740,968 | $ | 3,311,317 | $ | 2,491,090 | $ | 798,562 | $ | 3,289,652 | ||||||||||||
Net deferred loan origination fees included in the above loan table |
$ | 1,226 | $ | — | $ | 1,226 | $ | 887 | $ | — | $ | 887 |
B. Components of the net investment in leases are detailed as follows:
March 31, 2018 |
December 31, 2017 |
|||||||||||||||||||||||
(dollars in thousands) |
Originated |
Acquired |
Total Leases |
Originated |
Acquired |
Total Leases |
||||||||||||||||||
Minimum lease payments receivable |
$ | 88,752 | $ | 47,549 | $ | 136,301 | $ | 75,592 | $ | 55,219 | $ | 130,811 | ||||||||||||
Unearned lease income |
(12,523 |
) |
(7,336 |
) |
(19,859 |
) |
(10,338 |
) |
(9,523 |
) |
(19,861 |
) |
||||||||||||
Initial direct costs and deferred fees |
3,628 | 1,322 | 4,950 | 2,781 | 1,670 | 4,451 | ||||||||||||||||||
Total Leases |
$ | 79,857 | $ | 41,535 | $ | 121,392 | $ | 68,035 | $ | 47,366 | $ | 115,401 |
C. Non-Performing Loans and Leases(1)
March 31, 2018 |
December 31, 2017 |
|||||||||||||||||||||||
(dollars in thousands) |
Originated |
Acquired |
Total Loans and Leases |
Originated |
Acquired |
Total Loans and Leases |
||||||||||||||||||
Commercial mortgage |
$ | 89 | $ | 49 | $ | 138 | $ | 90 | $ | 782 | $ | 872 | ||||||||||||
Home equity lines and loans |
1,693 | 256 | 1,949 | 1,221 | 260 | 1,481 | ||||||||||||||||||
Residential mortgage |
1,491 | 1,113 | 2,604 | 1,505 | 2,912 | 4,417 | ||||||||||||||||||
Commercial and industrial |
1,926 | 573 | 2,499 | 826 | 880 | 1,706 | ||||||||||||||||||
Leases |
189 | 154 | 343 | 103 | — | 103 | ||||||||||||||||||
Total non-performing loans and leases |
$ | 5,388 | 2,145 | $ | 7,533 | $ | 3,745 | $ | 4,834 | $ | 8,579 |
(1) Purchased credit-impaired loans, which have been recorded at their fair values at acquisition, and which are performing, are excluded from this table, with the exception of $107 thousand and $167 thousand of purchased credit-impaired loans as of March 31, 2018 and December 31, 2017, respectively, which became non-performing subsequent to acquisition.
D. Purchased Credit-Impaired Loans
The outstanding principal balance and related carrying amount of purchased credit-impaired loans, for which the Corporation applies ASC 310-30, Accounting for Purchased Loans with Deteriorated Credit Quality, to account for the interest earned, as of the dates indicated, are as follows:
(dollars in thousands) |
March 31, 2018 |
December 31, 2017 |
||||||
Outstanding principal balance |
$ | 48,720 | $ | 46,543 | ||||
Carrying amount(1) |
$ | 33,228 | $ | 30,849 |
(1) Includes $109 thousand and $173 thousand of purchased credit-impaired loans as of March 31, 2018 and December 31, 2017, respectively, for which the Corporation could not estimate the timing or amount of expected cash flows to be collected at acquisition, and for which no accretable yield is recognized. Additionally, the table above includes $107 thousand and $167 thousand of purchased credit-impaired loans as of March 31, 2018 and December 31, 2017, respectively, which became non-performing subsequent to acquisition, which are disclosed in Note 5C, above, and which also have no accretable yield.
The following table presents changes in the accretable discount on purchased credit-impaired loans, for which the Corporation applies ASC 310-30, for the three months ended March 31, 2018:
(dollars in thousands) |
Accretable |
|||
Balance, December 31, 2017 |
$ | 4,083 | ||
Accretion |
(685 |
) |
||
Reclassifications from nonaccretable difference |
5 | |||
Additions/adjustments |
212 | |||
Disposals |
— | |||
Balance, March 31, 2018 |
$ | 3,615 |
E. Age Analysis of Past Due Loans and Leases
The following tables present an aging of all portfolio loans and leases as of the dates indicated:
Accruing Loans and Leases |
||||||||||||||||||||||||||||||||
As of March 31, 2018 (dollars in thousands) |
30 – 59 Days |
60 – 89 Days |
Over 89 Days |
Total Past Due |
Current* |
Total Accruing Loans and Leases |
Nonaccrual Loans and Leases |
Total Loans and Leases |
||||||||||||||||||||||||
Commercial mortgage |
$ | 533 | $ | 391 | $ | — | $ | 924 | $ | 1,540,395 | $ | 1,541,319 | $ | 138 | $ | 1,541,457 | ||||||||||||||||
Home equity lines and loans |
150 | — | — | 150 | 209,370 | 209,520 | 1,949 | 211,469 | ||||||||||||||||||||||||
Residential mortgage |
1,119 | — | — | 1,119 | 449,932 | 451,051 | 2,604 | 453,655 | ||||||||||||||||||||||||
Construction |
333 | — | — | 333 | 201,835 | 202,168 | — | 202,168 | ||||||||||||||||||||||||
Commercial and industrial |
499 | — | — | 499 | 724,233 | 724,732 | 2,499 | 727,231 | ||||||||||||||||||||||||
Consumer |
— | — | — | — | 48,423 | 48,423 | — | 48,423 | ||||||||||||||||||||||||
Leases |
2,640 | 881 | — | 3,521 | 117,528 | 121,049 | 343 | 121,392 | ||||||||||||||||||||||||
Total portfolio loans and leases |
$ | 5,274 | $ | 1,272 | $ | — | $ | 6,546 | $ | 3,291,716 | $ | 3,298,262 | $ | 7,533 | $ | 3,305,795 |
Accruing Loans and Leases |
||||||||||||||||||||||||||||||||
As of December 31, 2017 (dollars in thousands) |
30 – 59 Days |
60 – 89 Days |
Over 89 Days |
Total Past Due |
Current* |
Total Accruing Loans and Leases |
Nonaccrual Loans and Leases |
Total Loans and Leases |
||||||||||||||||||||||||
Commercial mortgage |
$ | 1,366 | $ | 2,428 | $ | — | $ | 3,794 | $ | 1,518,711 | $ | 1,522,505 | $ | 872 | $ | 1,523,377 | ||||||||||||||||
Home equity lines and loans |
338 | 10 | — | 348 | 216,446 | 216,794 | 1,481 | 218,275 | ||||||||||||||||||||||||
Residential mortgage |
1,386 | 79 | — | 1,465 | 453,004 | 454,469 | 4,417 | 458,886 | ||||||||||||||||||||||||
Construction |
— | — | — | — | 212,454 | 212,454 | — | 212,454 | ||||||||||||||||||||||||
Commercial and industrial |
658 | 286 | — | 944 | 716,662 | 717,606 | 1,706 | 719,312 | ||||||||||||||||||||||||
Consumer |
1,106 | — | — | 1,106 | 37,047 | 38,153 | — | 38,153 | ||||||||||||||||||||||||
Leases |
125 | 177 | — | 302 | 114,996 | 115,298 | 103 | 115,401 | ||||||||||||||||||||||||
Total portfolio loans and leases |
$ | 4,979 | $ | 2,980 | $ | — | $ | 7,959 | $ | 3,269,320 | $ | 3,277,279 | $ | 8,579 | $ | 3,285,858 |
*Included as “current” are $1.8 million and $4.1 million of loans and leases as of March 31, 2018 and December 31, 2017, respectively, which are classified as administratively delinquent. An administratively delinquent loan is one which has been approved for a renewal or extension but has not had all the required documents fully executed as of the reporting date. The Corporation does not consider these loans to be delinquent.
The following tables present an aging of originated portfolio loans and leases as of the dates indicated:
Accruing Loans and Leases |
||||||||||||||||||||||||||||||||
As of March 31, 2018 (dollars in thousands) |
30 – 59 Days |
60 – 89 Days |
Over 89 Days |
Total Past Due |
Current* |
Total Accruing Loans and Leases |
Nonaccrual Loans and Leases |
Total Loans and Leases |
||||||||||||||||||||||||
Commercial mortgage |
$ | 425 | $ | 391 | $ | — | $ | 816 | $ | 1,150,673 | $ | 1,151,489 | $ | 89 | $ | 1,151,578 | ||||||||||||||||
Home equity lines and loans |
150 | — | — | 150 | 176,781 | 176,931 | 1,693 | 178,624 | ||||||||||||||||||||||||
Residential mortgage |
647 | — | — | 647 | 358,104 | 358,751 | 1,491 | 360,242 | ||||||||||||||||||||||||
Construction |
— | — | — | — | 135,480 | 135,480 | — | 135,480 | ||||||||||||||||||||||||
Commercial and industrial |
99 | — | — | 99 | 611,290 | 611,389 | 1,926 | 613,315 | ||||||||||||||||||||||||
Consumer |
— | — | — | — | 45,731 | 45,731 | — | 45,731 | ||||||||||||||||||||||||
Leases |
788 | 503 | — | 1,291 | 78,377 | 79,668 | 189 | 79,857 | ||||||||||||||||||||||||
Total originated portfolio loans and leases |
$ | 2,109 | $ | 894 | $ | — | $ | 3,003 | $ | 2,556,436 | $ | 2,559,439 | $ | 5,388 | $ | 2,564,827 |
Accruing Loans and Leases |
||||||||||||||||||||||||||||||||
As of December 31, 2017 (dollars in thousands) |
30 – 59 Days |
60 – 89 Days |
Over 89 Days |
Total Past Due |
Current* |
Total Accruing Loans and Leases |
Nonaccrual Loans and Leases |
Total Loans and Leases |
||||||||||||||||||||||||
Commercial mortgage |
$ | 1,255 | $ | 81 | $ | — | $ | 1,336 | $ | 1,120,901 | $ | 1,122,237 | $ | 90 | $ | 1,122,327 | ||||||||||||||||
Home equity lines and loans |
26 | — | — | 26 | 182,036 | 182,062 | 1,221 | 183,283 | ||||||||||||||||||||||||
Residential mortgage |
721 | — | — | 721 | 358,709 | 359,430 | 1,505 | 360,935 | ||||||||||||||||||||||||
Construction |
— | — | — | — | 128,266 | 128,266 | — | 128,266 | ||||||||||||||||||||||||
Commercial and industrial |
439 | 236 | — | 675 | 587,803 | 588,478 | 826 | 589,304 | ||||||||||||||||||||||||
Consumer |
21 | — | — | 21 | 35,125 | 35,146 | — | 35,146 | ||||||||||||||||||||||||
Leases |
125 | 177 | — | 302 | 67,630 | 67,932 | 103 | 68,035 | ||||||||||||||||||||||||
Total originated portfolio loans and leases |
$ | 2,587 | $ | 494 | $ | — | $ | 3,081 | $ | 2,480,470 | $ | 2,483,551 | $ | 3,745 | $ | 2,487,296 |
*Included as “current” are $1.8 million and $4.0 million of loans and leases as of March 31, 2018 and December 31, 2017, respectively, which are classified as administratively delinquent. An administratively delinquent loan is one which has been approved for a renewal or extension but has not had all the required documents fully executed as of the reporting date. The Corporation does not consider these loans to be delinquent.
The following tables present an aging of acquired portfolio loans and leases as of the dates indicated:
Accruing Loans and Leases |
||||||||||||||||||||||||||||||||
As of March 31, 2018 (dollars in thousands) |
30 – 59 Days |
60 – 89 Days |
Over 89 Days |
Total Past Due |
Current* |
Total Accruing Loans and Leases |
Nonaccrual Loans and Leases |
Total Loans and Leases |
||||||||||||||||||||||||
Commercial mortgage |
$ | 108 | $ | — | $ | — | $ | 108 | $ | 389,722 | $ | 389,830 | $ | 49 | $ | 389,879 | ||||||||||||||||
Home equity lines and loans |
— | — | — | — | 32,589 | 32,589 | 256 | 32,845 | ||||||||||||||||||||||||
Residential mortgage |
472 | — | — | 472 | 91,828 | 92,300 | 1,113 | 93,413 | ||||||||||||||||||||||||
Construction |
333 | — | — | 333 | 66,355 | 66,688 | — | 66,688 | ||||||||||||||||||||||||
Commercial and industrial |
400 | — | — | 400 | 112,943 | 113,343 | 573 | 113,916 | ||||||||||||||||||||||||
Consumer |
— | — | — | — | 2,692 | 2,692 | — | 2,692 | ||||||||||||||||||||||||
Leases |
1,852 | 378 | — | 2,230 | 39,151 | 41,381 | 154 | 41,535 | ||||||||||||||||||||||||
Total acquired portfolio loans and leases |
$ | 3,165 | $ | 378 | $ | — | $ | 3,543 | $ | 735,280 | $ | 738,823 | $ | 2,145 | $ | 740,968 |
Accruing Loans and Leases |
||||||||||||||||||||||||||||||||
As of December 31, 2017 (dollars in thousands) |
30 – 59 Days |
60 – 89 Days |
Over 89 Days |
Total Past Due |
Current* |
Total Accruing Loans and Leases |
Nonaccrual Loans and Leases |
Total Loans and Leases |
||||||||||||||||||||||||
Commercial mortgage |
$ | 111 | $ | 2,347 | $ | — | $ | 2,458 | $ | 397,810 | $ | 400,268 | $ | 782 | $ | 401,050 | ||||||||||||||||
Home equity lines and loans |
312 | 10 | — | 322 | 34,410 | 34,732 | 260 | 34,992 | ||||||||||||||||||||||||
Residential mortgage |
665 | 79 | — | 744 | 94,295 | 95,039 | 2,912 | 97,951 | ||||||||||||||||||||||||
Construction |
— | — | — | — | 84,188 | 84,188 | — | 84,188 | ||||||||||||||||||||||||
Commercial and industrial |
219 | 50 | — | 269 | 128,859 | 129,128 | 880 | 130,008 | ||||||||||||||||||||||||
Consumer |
1,085 | — | — | 1,085 | 1,922 | 3,007 | — | 3,007 | ||||||||||||||||||||||||
Leases |
— | — | — | — | 47,366 | 47,366 | — | 47,366 | ||||||||||||||||||||||||
Total acquired portfolio loans and leases |
$ | 2,392 | $ | 2,486 | $ | — | $ | 4,878 | $ | 788,850 | $ | 793,728 | $ | 4,834 | $ | 798,562 |
*Included as “current” are $0 and $102 thousand of loans and leases as of March 31, 2018 and December 31, 2017, respectively, which are classified as administratively delinquent. An administratively delinquent loan is one which has been approved for a renewal or extension but has not had all the required documents fully executed as of the reporting date. The Corporation does not consider these loans to be delinquent.
F. Allowance for Loan and Lease Losses (the “Allowance”)
The following tables detail the roll-forward of the Allowance for the three months ended March 31, 2018 and 2017:
(dollars in thousands) |
Commercial |
Home Equity |
Residential |
Construction |
Commercial |
Consumer |
Leases |
Unallocated |
Total |
|||||||||||||||||||||||||||
Balance, December 31, 2017 |
$ | 7,550 | $ | 1,086 | $ | 1,926 | $ | 937 | $ | 5,038 | $ | 246 | $ | 742 | $ | — | $ | 17,525 | ||||||||||||||||||
Charge-offs |
— | (25 |
) |
— | — | (283 |
) |
(49 |
) |
(596 |
) |
— | (953 |
) |
||||||||||||||||||||||
Recoveries |
3 | — | — | 1 | — | 1 | 55 | — | 60 | |||||||||||||||||||||||||||
Provision for loan and lease losses |
(379 |
) |
(16 |
) |
(28 |
) |
(94 |
) |
606 | 93 | 848 | — | 1,030 | |||||||||||||||||||||||
Balance, March 31, 2018 |
$ | 7,174 | $ | 1,045 | $ | 1,898 | $ | 844 | $ | 5,361 | $ | 291 | $ | 1,049 | $ | — | $ | 17,662 |
(dollars in thousands) |
Commercial |
Home Equity |
Residential |
Construction |
Commercial |
Consumer |
Leases |
Unallocated |
Total |
|||||||||||||||||||||||||||
Balance, December 31, 2016 |
$ | 6,227 | $ | 1,255 | $ | 1,917 | $ | 2,233 | $ | 5,142 | $ | 153 | $ | 559 | $ | — | $ | 17,486 | ||||||||||||||||||
Charge-offs |
— | (438 |
) |
(27 |
) |
— | (59 |
) |
(41 |
) |
(206 |
) |
— | (771 |
) |
|||||||||||||||||||||
Recoveries |
3 | — | — | 1 | — | 2 | 95 | — | 101 | |||||||||||||||||||||||||||
Provision for loan and lease losses |
180 | 426 | (92 |
) |
(39 |
) |
(336 |
) |
21 | 131 | — | 291 | ||||||||||||||||||||||||
Balance, March 31, 2017 |
$ | 6,410 | $ | 1,243 | $ | 1,798 | $ | 2,195 | $ | 4,747 | $ | 135 | $ | 579 | $ | — | $ | 17,107 |
The following tables detail the allocation of the Allowance for all portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of March 31, 2018 and December 31, 2017:
As of March 31, 2018 (dollars in thousands) |
Commercial |
Home Equity |
Residential |
Construction |
Commercial |
Consumer |
Leases |
Unallocated |
Total |
|||||||||||||||||||||||||||
Allowance on loans and leases: |
||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | — | $ | 19 | $ | 224 | $ | — | $ | 41 | $ | 4 | $ | — | $ | — | $ | 288 | ||||||||||||||||||
Collectively evaluated for impairment |
7,174 | 1,026 | 1,674 | 844 | 5,320 | 287 | 1,049 | — | 17,374 | |||||||||||||||||||||||||||
Purchased credit-impaired(1) |
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Total |
$ | 7,174 | $ | 1,045 | $ | 1,898 | $ | 844 | $ | 5,361 | $ | 291 | $ | 1,049 | $ | — | $ | 17,662 |
As of December 31, 2017 (dollars in thousands) |
Commercial |
Home Equity |
Residential |
Construction |
Commercial |
Consumer |
Leases |
Unallocated |
Total |
|||||||||||||||||||||||||||
Allowance on loans and leases: |
||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | — | $ | 19 | $ | 230 | $ | — | $ | 5 | $ | 4 | $ | — | $ | — | $ | 258 | ||||||||||||||||||
Collectively evaluated for impairment |
7,550 | 1,067 | 1,696 | 937 | 5,033 | 242 | 742 | — | 17,267 | |||||||||||||||||||||||||||
Purchased credit-impaired(1) |
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Total |
$ | 7,550 | $ | 1,086 | $ | 1,926 | $ | 937 | $ | 5,038 | $ | 246 | $ | 742 | $ | — | $ | 17,525 |
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
The following tables detail the carrying value for all portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of March 31, 2018 and December 31, 2017:
As of March 31, 2018 (dollars in thousands) |
Commercial |
Home Equity |
Residential |
Construction |
Commercial and Industrial |
Consumer |
Leases |
Total |
||||||||||||||||||||||||
Carrying value of loans and leases: |
||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 1,394 | $ | 2,626 | $ | 5,350 | $ | — | $ | 2,754 | $ | 27 | $ | — | $ | 12,151 | ||||||||||||||||
Collectively evaluated for impairment |
1,525,887 | 208,333 | 448,305 | 186,559 | 721,545 | 48,396 | 121,392 | 3,260,417 | ||||||||||||||||||||||||
Purchased credit-impaired(1) |
14,176 | 510 | — | 15,609 | 2,932 | — | — | 33,227 | ||||||||||||||||||||||||
Total |
$ | 1,541,457 | $ | 211,469 | $ | 453,655 | $ | 202,168 | $ | 727,231 | $ | 48,423 | $ | 121,392 | $ | 3,305,795 |
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
As of December 31, 2017 (dollars in thousands) |
Commercial |
Home Equity |
Residential |
Construction |
Commercial and Industrial |
Consumer |
Leases |
Total |
||||||||||||||||||||||||
Carrying value of loans and leases: |
||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 2,128 | $ | 2,162 | $ | 7,726 | $ | — | $ | 1,897 | $ | 27 | $ | — | $ | 13,940 | ||||||||||||||||
Collectively evaluated for impairment |
1,503,825 | 215,604 | 451,160 | 204,088 | 712,865 | 38,126 | 115,401 | 3,241,069 | ||||||||||||||||||||||||
Purchased credit-impaired(1) |
17,424 | 509 | — | 8,366 | 4,550 | — | — | 30,849 | ||||||||||||||||||||||||
Total |
$ | 1,523,377 | $ | 218,275 | $ | 458,886 | $ | 212,454 | $ | 719,312 | $ | 38,153 | $ | 115,401 | $ | 3,285,858 |
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
The following tables detail the allocation of the Allowance for originated portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of March 31, 2018 and December 31, 2017:
As of March 31, 2018 (dollars in thousands) |
Commercial |
Home Equity |
Residential |
Construction |
Commercial |
Consumer |
Leases |
Total |
||||||||||||||||||||||||
Allowance on loans and leases: |
||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | — | $ | 19 | $ | 168 | $ | — | $ | 5 | $ | 4 | $ | — | $ | 196 | ||||||||||||||||
Collectively evaluated for impairment |
7,174 | 1,026 | 1,674 | 844 | 5,320 | 287 | 1,049 | 17,374 | ||||||||||||||||||||||||
Total |
$ | 7,174 | $ | 1,045 | $ | 1,842 | $ | 844 | $ | 5,325 | $ | 291 | $ | 1,049 | $ | 17,570 |
As of December 31, 2017 (dollars in thousands) |
Commercial |
Home Equity |
Residential |
Construction |
Commercial |
Consumer |
Leases |
Total |
||||||||||||||||||||||||
Allowance on loans and leases: |
||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | — | $ | 19 | $ | 180 | $ | — | $ | 5 | $ | 4 | $ | — | $ | 208 | ||||||||||||||||
Collectively evaluated for impairment |
7,550 | 1,067 | 1,696 | 937 | 5,033 | 242 | 742 | 17,267 | ||||||||||||||||||||||||
Total |
$ | 7,550 | $ | 1,086 | $ | 1,876 | $ | 937 | $ | 5,038 | $ | 246 | $ | 742 | $ | 17,475 |
The following tables detail the carrying value for originated portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of March 31, 2018 and December 31, 2017:
As of March 31, 2018 (dollars in thousands) |
Commercial |
Home Equity |
Residential |
Construction |
Commercial |
Consumer |
Leases |
Total |
||||||||||||||||||||||||
Carrying value of loans and leases: |
||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 1,345 | $ | 2,370 | $ | 3,637 | $ | — | $ | 2,288 | $ | 27 | $ | — | $ | 9,667 | ||||||||||||||||
Collectively evaluated for impairment |
1,150,233 | 176,254 | 356,605 | 135,480 | 611,027 | 45,704 | 79,857 | 2,555,160 | ||||||||||||||||||||||||
Total |
$ | 1,151,578 | $ | 178,624 | $ | 360,242 | $ | 135,480 | $ | 613,315 | $ | 45,731 | $ | 79,857 | $ | 2,564,827 |
As of December 31, 2017 |
Commercial |
Home Equity |
Residential |
Construction |
Commercial |
Consumer |
Leases |
Total |
||||||||||||||||||||||||
(dollars in thousands) |
||||||||||||||||||||||||||||||||
Carrying value of loans and leases: |
||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 1,345 | $ | 1,902 | $ | 4,418 | $ | — | $ | 1,186 | $ | 27 | $ | — | $ | 8,878 | ||||||||||||||||
Collectively evaluated for impairment |
1,120,982 | 181,381 | 356,517 | 128,266 | 588,118 | 35,119 | 68,035 | 2,478,418 | ||||||||||||||||||||||||
Total |
$ | 1,122,327 | $ | 183,283 | $ | 360,935 | $ | 128,266 | $ | 589,304 | $ | 35,146 | $ | 68,035 | $ | 2,487,296 |
The following tables detail the allocation of the Allowance for acquired portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of March 31, 2018 and December 31, 2017:
As of March 31, 2018 (dollars in thousands) |
Commercial |
Home Equity |
Residential |
Construction |
Commercial |
Consumer |
Leases |
Total |
||||||||||||||||||||||||
Allowance on loans and leases: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | — | $ | — | $ | 56 | $ | — | $ | 36 | $ | — | $ | — | $ | 92 | ||||||||||||||||
Collectively evaluated for impairment |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Purchased credit-impaired(1) |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total |
$ | — | $ | — | $ | 56 | $ | — | $ | 36 | $ | — | $ | — | $ | 92 |
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
As of December 31, 2017 (dollars in thousands) |
Commercial |
Home Equity |
Residential |
Construction |
Commercial |
Consumer |
Leases |
Total |
||||||||||||||||||||||||
Allowance on loans and leases: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | — | $ | — | $ | 50 | $ | — | $ | — | $ | — | $ | — | $ | 50 | ||||||||||||||||
Collectively evaluated for impairment |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Purchased credit-impaired(1) |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total |
$ | — | $ | — | $ | 50 | $ | — | $ | — | $ | — | $ | — | $ | 50 |
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
The following tables detail the carrying value for acquired portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of March 31, 2018 and December 31, 2017:
As of March 31, 2018 (dollars in thousands) |
Commercial |
Home Equity |
Residential |
Construction |
Commercial |
Consumer |
Leases |
Total |
||||||||||||||||||||||||
Carrying value of loans and leases: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 49 | $ | 256 | $ | 1,713 | $ | — | $ | 466 | $ | — | $ | — | $ | 2,484 | ||||||||||||||||
Collectively evaluated for impairment |
375,654 | 32,079 | 91,700 | 51,079 | 110,518 | 2,692 | 41,535 | 705,257 | ||||||||||||||||||||||||
Purchased credit-impaired(1) |
14,176 | 510 | — | 15,609 | 2,932 | — | — | 33,227 | ||||||||||||||||||||||||
Total |
$ | 389,879 | $ | 32,845 | $ | 93,413 | $ | 66,688 | $ | 113,916 | $ | 2,692 | $ | 41,535 | $ | 740,968 |
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
As of December 31, 2017 |
Commercial |
Home Equity |
Residential |
Construction |
Commercial |
Consumer |
Leases |
Total |
||||||||||||||||||||||||
(dollars in thousands) |
||||||||||||||||||||||||||||||||
Carrying value of loans and leases: |
||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 783 | $ | 260 | $ | 3,308 | $ | — | $ | 711 | $ | — | $ | — | $ | 5,062 | ||||||||||||||||
Collectively evaluated for impairment |
382,843 | 34,223 | 94,643 | 75,822 | 124,747 | 3,007 | 47,366 | 762,651 | ||||||||||||||||||||||||
Purchased credit-impaired(1) |
17,424 | 509 | — | 8,366 | 4,550 | — | — | 30,849 | ||||||||||||||||||||||||
Total |
$ | 401,050 | $ | 34,992 | $ | 97,951 | $ | 84,188 | $ | 130,008 | $ | 3,007 | $ | 47,366 | $ | 798,562 |
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
As part of the process of determining the Allowance for the different segments of the loan and lease portfolio, Management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by both in-house staff as well as external loan reviewers. The result of these reviews is reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:
• |
Pass – Loans considered satisfactory with no indications of deterioration. |
• |
Special mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. |
• |
Substandard - Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. |
• |
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. |
In addition, for the remaining segments of the loan and lease portfolio, which include residential mortgage, home equity lines and loans, consumer, and leases, the credit quality indicator used to determine this component of the Allowance is based on performance status.
The following tables detail the carrying value of all portfolio loans and leases by portfolio segment based on the credit quality indicators used to determine the Allowance as of March 31, 2018 and December 31, 2017:
Credit Risk Profile by Internally Assigned Grade
Commercial Mortgage |
Construction |
Commercial and Industrial |
Total |
|||||||||||||||||||||||||||||
(dollars in thousands) |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
||||||||||||||||||||||||
Pass |
$ | 1,502,268 | $ | 1,490,862 | $ | 179,047 | $ | 193,227 | $ | 717,447 | $ | 711,145 | $ | 2,398,762 | $ | 2,395,234 | ||||||||||||||||
Special Mention |
11,403 | 13,448 | 2,528 | 3,902 | 1,705 | 889 | 15,636 | 18,239 | ||||||||||||||||||||||||
Substandard |
27,221 | 18,194 | 20,593 | 15,325 | 7,015 | 6,013 | 54,829 | 39,532 | ||||||||||||||||||||||||
Doubtful |
565 | 873 | — | — | 1,063 | 1,265 | 1,628 | 2,138 | ||||||||||||||||||||||||
Total |
$ | 1,541,457 | $ | 1,523,377 | $ | 202,168 | $ | 212,454 | $ | 727,230 | $ | 719,312 | $ | 2,470,855 | $ | 2,455,143 |
Credit Risk Profile by Payment Activity
Residential Mortgage |
Home Equity Lines and Loans |
Consumer |
Leases |
Total |
||||||||||||||||||||||||||||||||||||
(dollars in thousands) |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
||||||||||||||||||||||||||||||
Performing |
$ | 451,051 | $ | 454,469 | $ | 209,520 | $ | 216,794 | $ | 48,423 | $ | 38,153 | $ | 121,049 | $ | 115,298 | $ | 830,043 | $ | 824,714 | ||||||||||||||||||||
Non-performing |
2,604 | 4,417 | 1,949 | 1,481 | — | — | 343 | 103 | 4,896 | 6,001 | ||||||||||||||||||||||||||||||
Total |
$ | 453,655 | $ | 458,886 | $ | 211,469 | $ | 218,275 | $ | 48,423 | $ | 38,153 | $ | 121,392 | $ | 115,401 | $ | 834,939 | $ | 830,715 |
The following tables detail the carrying value of originated portfolio loans and leases by portfolio segment based on the credit quality indicators used to determine the Allowance as of March 31, 2018 and December 31, 2017:
Credit Risk Profile by Internally Assigned Grade
Commercial Mortgage |
Construction |
Commercial and Industrial |
Total |
|||||||||||||||||||||||||||||
(dollars in thousands) |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
||||||||||||||||||||||||
Pass |
$ | 1,140,584 | $ | 1,114,171 | $ | 131,797 | $ | 126,260 | $ | 607,758 | $ | 586,896 | $ | 1,880,139 | $ | 1,827,327 | ||||||||||||||||
Special Mention |
994 | — | 1,253 | — | 1,254 | 664 | 3,501 | 664 | ||||||||||||||||||||||||
Substandard |
10,000 | 8,156 | 2,430 | 2,006 | 4,033 | 1,389 | 16,463 | 11,551 | ||||||||||||||||||||||||
Doubtful |
— | — | — | — | 270 | 355 | 270 | 355 | ||||||||||||||||||||||||
Total |
$ | 1,151,578 | $ | 1,122,327 | $ | 135,480 | $ | 128,266 | $ | 613,315 | $ | 589,304 | $ | 1,900,373 | $ | 1,839,897 |
Credit Risk Profile by Payment Activity
Residential Mortgage |
Home Equity Lines and Loans |
Consumer |
Leases |
Total |
||||||||||||||||||||||||||||||||||||
(dollars in thousands) |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
||||||||||||||||||||||||||||||
Performing |
$ | 358,751 | $ | 359,430 | $ | 176,931 | $ | 182,062 | $ | 45,731 | $ | 35,146 | $ | 79,668 | $ | 67,932 | $ | 661,081 | $ | 644,570 | ||||||||||||||||||||
Non-performing |
1,491 | 1,505 | 1,693 | 1,221 | — | — | 189 | 103 | 3,373 | 2,829 | ||||||||||||||||||||||||||||||
Total |
$ | 360,242 | $ | 360,935 | $ | 178,624 | $ | 183,283 | $ | 45,731 | $ | 35,146 | $ | 79,857 | $ | 68,035 | $ | 664,454 | $ | 647,399 |
The following tables detail the carrying value of acquired portfolio loans and leases by portfolio segment based on the credit quality indicators used to determine the Allowance as of March 31, 2018 and December 31, 2017:
Credit Risk Profile by Internally Assigned Grade
Commercial Mortgage |
Construction |
Commercial and Industrial |
Total |
|||||||||||||||||||||||||||||
(dollars in thousands) |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
||||||||||||||||||||||||
Pass |
$ | 361,684 | $ | 376,691 | $ | 47,250 | $ | 66,967 | $ | 109,690 | $ | 124,249 | $ | 518,624 | $ | 567,907 | ||||||||||||||||
Special Mention |
10,409 | 13,448 | 1,275 | 3,902 | 451 | 225 | 12,135 | 17,575 | ||||||||||||||||||||||||
Substandard |
17,221 | 10,038 | 18,163 | 13,319 | 2,982 | 4,624 | 38,366 | 27,981 | ||||||||||||||||||||||||
Doubtful |
565 | 873 | — | — | 793 | 910 | 1,358 | 1,783 | ||||||||||||||||||||||||
Total |
$ | 389,879 | $ | 401,050 | $ | 66,688 | $ | 84,188 | $ | 113,916 | $ | 130,008 | $ | 570,483 | $ | 615,246 |
Credit Risk Profile by Payment Activity
Residential Mortgage |
Home Equity Lines and Loans |
Consumer |
Leases |
Total |
||||||||||||||||||||||||||||||||||||
(dollars in thousands) |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
March 31, 2018 |
December 31, 2017 |
||||||||||||||||||||||||||||||
Performing |
$ | 92,300 | $ | 95,039 | $ | 32,589 | $ | 34,732 | $ | 2,692 | $ | 3,007 | $ | 41,381 | $ | 47,366 | $ | 168,962 | $ | 180,144 | ||||||||||||||||||||
Non-performing |
1,113 | 2,912 | 256 | 260 | — | — | 154 | — | 1,523 | 3,172 | ||||||||||||||||||||||||||||||
Total |
$ | 93,413 | $ | 97,951 | $ | 32,845 | $ | 34,992 | $ | 2,692 | $ | 3,007 | $ | 41,535 | $ | 47,366 | $ | 170,485 | $ | 183,316 |
G. Troubled Debt Restructurings (“TDRs”)
The restructuring of a loan is considered a “troubled debt restructuring” if both of the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the creditor has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan, and (e) for leases, a reduced lease payment. A less common concession granted is the forgiveness of a portion of the principal.
The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower, were a concession not granted. Similarly, the determination of whether a concession has been granted is very subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.
The following table presents the balance of TDRs as of the indicated dates:
(dollars in thousands) |
March 31, 2018 |
December 31, 2017 |
||||||
TDRs included in nonperforming loans and leases |
$ | 1,125 | $ | 3,289 | ||||
TDRs in compliance with modified terms |
5,235 | 5,800 | ||||||
Total TDRs |
$ | 6,360 | $ | 9,089 |
The following table presents information regarding loan and lease modifications categorized as TDRs for the three months ended March 31, 2018:
For the Three Months Ended March 31, 2018 |
||||||||||||
(dollars in thousands) |
Number of Contracts |
Pre-Modification Outstanding Recorded Investment |
Post-Modification Outstanding Recorded Investment |
|||||||||
Commercial and industrial |
1 | $ | 18 | $ | 18 |
The following table presents information regarding the types of loan and lease modifications made for the three months ended March 31, 2018:
Number of Contracts |
||||||||||||||||||||
Loan Term Extension |
Interest Rate Change and Term Extension |
Interest Rate Change and/or Interest-Only Period |
Contractual Payment Reduction (Leases only) |
Temporary Payment Deferral |
||||||||||||||||
Commercial and industrial |
— | 1 | — | — | — |
During the three months ended March 31, 2018, one home equity line of credit with a principal balance of $25 thousand which had been previously modified to a troubled debt restructuring defaulted and was charged off.
H. Impaired Loans
The following tables detail the recorded investment and principal balance of impaired loans by portfolio segment, their related allowance for loan and lease losses and interest income recognized for the three months ended March 31, 2018 and 2017 (purchased credit-impaired loans are not included in the tables):
As of or for the Three Months Ended March 31, 2018 (dollars in thousands) |
Recorded Investment** |
Principal Balance |
Related Allowance |
Average Principal Balance |
Interest Income Recognized |
Cash-Basis Interest Income Recognized |
||||||||||||||||||
Impaired loans with related allowance: |
||||||||||||||||||||||||
Home equity lines and loans |
$ | 574 | $ | 574 | $ | 19 | $ | 575 | $ | 6 | $ | — | ||||||||||||
Residential mortgage |
1,796 | 1,796 | 224 | 1,801 | 21 | — | ||||||||||||||||||
Commercial and industrial |
54 | 110 | 40 | 97 | — | — | ||||||||||||||||||
Consumer |
27 | 27 | 4 | 27 | — | — | ||||||||||||||||||
Total |
$ | 2,451 | $ | 2,507 | $ | 287 | $ | 2,500 | $ | 27 | $ | — | ||||||||||||
Impaired loans without related allowance*: |
||||||||||||||||||||||||
Commercial mortgage |
$ | 1,394 | $ | 1,483 | $ | — | $ | 1,394 | $ | 23 | $ | — | ||||||||||||
Home equity lines and loans |
2,052 | 2,114 | — | 2,094 | 2 | — | ||||||||||||||||||
Residential mortgage |
3,554 | 3,758 | — | 154 | — | — | ||||||||||||||||||
Commercial and industrial |
2,700 | 3,498 | — | 2,872 | 5 | — | ||||||||||||||||||
Total |
$ | 9,700 | $ | 10,853 | $ | — | $ | 6,514 | $ | 30 | $ | — | ||||||||||||
Grand total |
$ | 12,151 | $ | 13,360 | $ | 287 | $ | 9,014 | $ | 57 | $ | — |
*The table above does not include the recorded investment of $510 thousand of impaired leases without a related allowance for loan and lease losses.
**Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.
As of or for the Three Months Ended March 31, 2017 (dollars in thousands) |
Recorded Investment** |
Principal Balance |
Related Allowance |
Average Principal Balance |
Interest Income Recognized |
Cash-Basis Interest Income Recognized |
||||||||||||||||||
Impaired loans with related allowance: |
||||||||||||||||||||||||
Residential mortgage |
$ | 620 | $ | 619 | $ | 73 | $ | 621 | $ | 7 | $ | — | ||||||||||||
Commercial and industrial |
88 | 121 | 11 | 110 | 1 | — | ||||||||||||||||||
Consumer |
29 | 29 | 5 | 29 | — | — | ||||||||||||||||||
Total |
$ | 737 | $ | 769 | $ | 89 | $ | 760 | $ | 8 | $ | — | ||||||||||||
Impaired loans without related allowance*: |
||||||||||||||||||||||||
Commercial mortgage |
$ | 1,570 | $ | 1,570 | $ | — | $ | 1,573 | $ | 15 | $ | — | ||||||||||||
Home equity lines and loans |
1,945 | 2,806 | — | 2,358 | 2 | — | ||||||||||||||||||
Residential mortgage |
6,637 | 6,623 | — | 6,755 | 53 | — | ||||||||||||||||||
Commercial and industrial |
2,357 | 3,156 | — | 2,456 | 2 | — | ||||||||||||||||||
Total |
$ | 12,509 | $ | 14,155 | $ | — | $ | 13,142 | $ | 72 | $ | — | ||||||||||||
Grand total |
$ | 13,246 | $ | 14,924 | $ | 89 | $ | 13,902 | $ | 80 | $ | — |
*The table above does not include the recorded investment of $232 thousand of impaired leases without a related allowance for loan and lease losses.
**Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.
(dollars in thousands) As of December 31, 2017 |
Recorded Investment (2) |
Principal Balance |
Related Allowance |
|||||||||
Impaired loans with related allowance: |
||||||||||||
Home equity lines and loans |
$ | 577 | 577 | 19 | ||||||||
Residential mortgage |
2,436 | $ | 2,435 | $ | 230 | |||||||
Commercial and industrial |
18 | 19 | 5 | |||||||||
Consumer |
27 | 27 | 4 | |||||||||
Total |
$ | 3,058 | $ | 3,058 | $ | 258 | ||||||
Impaired loans without related allowance(1): |
||||||||||||
Home equity lines and loans |
$ | 1,585 | $ | 1,645 | $ | — | ||||||
Residential mortgage |
5,290 | 5,529 | — | |||||||||
Commercial and industrial |
1,879 | 3,613 | — | |||||||||
Commercial mortgage |
2,128 | 2,218 | — | |||||||||
Total |
$ | 10,882 | $ | 13,005 | $ | — | ||||||
Grand total |
$ | 13,940 | $ | 16,063 | $ | 258 |
(1) |
The table above does not include the recorded investment of $272 thousand of impaired leases without a related Allowance. |
(2) |
Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal. |
I. Loan Mark
Loans acquired in mergers and acquisitions are recorded at fair value as of the date of the transaction. This adjustment to the acquired principal amount is referred to as the “Loan Mark”. With the exception of purchased credit impaired loans, for which the Loan Mark is accounted under ASC 310-30, the Loan Mark is amortized or accreted as an adjustment to yield over the lives of the loans.
The following tables detail, for acquired loans, the outstanding principal, remaining loan mark, and recorded investment, by portfolio segment, as of the dates indicated:
As of March 31, 2018 |
||||||||||||
(dollars in thousands) |
Outstanding Principal |
Remaining Loan Mark |
Recorded Investment |
|||||||||
Commercial mortgage |
$ | 403,196 | $ | (13,317 | ) | $ | 389,879 | |||||
Home equity lines and loans |
35,697 | (2,852 | ) | 32,845 | ||||||||
Residential mortgage |
96,609 | (3,196 | ) | 93,413 | ||||||||
Construction |
67,926 | (1,238 | ) | 66,688 | ||||||||
Commercial and industrial |
123,250 | (9,334 | ) | 113,916 | ||||||||
Consumer |
2,729 | (37 | ) | 2,692 | ||||||||
Leases |
43,820 | (2,285 | ) | 41,535 | ||||||||
Total |
$ | 773,227 | $ | (32,259 | ) | $ | 740,968 |
As of December 31, 2017 |
||||||||||||
(dollars in thousands) |
Outstanding Principal |
Remaining Loan Mark |
Recorded Investment |
|||||||||
Commercial mortgage |
$ | 412,263 | $ | (11,213 |
) |
$ | 401,050 | |||||
Home equity lines and loans |
37,944 | (2,952 |
) |
34,992 | ||||||||
Residential mortgage |
101,523 | (3,572 |
) |
97,951 | ||||||||
Construction |
86,081 | (1,893 |
) |
84,188 | ||||||||
Commercial and industrial |
141,960 | (11,952 |
) |
130,008 | ||||||||
Consumer |
3,051 | (44 |
) |
3,007 | ||||||||
Leases |
50,530 | (3,164 |
) |
47,366 | ||||||||
Total |
$ | 833,352 | $ | (34,790 |
) |
$ | 798,562 |
Note 6 - Mortgage Servicing Rights
The following table summarizes the Corporation’s activity related to mortgage servicing rights (“MSRs”) for the three months ended March 31, 2018 and 2017:
Three Months Ended March 31, |
||||||||
(dollars in thousands) |
2018 |
2017 |
||||||
Balance, beginning of period |
$ | 5,861 | $ | 5,582 | ||||
Additions |
16 | 276 | ||||||
Amortization |
(221 |
) |
(169 |
) |
||||
Recovery / (Impairment) |
50 | (3 |
) |
|||||
Balance, end of period |
$ | 5,706 | $ | 5,686 | ||||
Fair value |
$ | 6,791 | $ | 6,394 | ||||
Residential mortgage loans serviced for others |
634,970 | 638,553 |
As of March 31, 2018, and December 31, 2017, key economic assumptions and the sensitivity of the current fair value of MSRs to immediate 10 and 20 percent adverse changes in those assumptions are as follows:
(dollars in thousands) |
March 31, 2018 |
December 31, 2017 |
||||||
Fair value amount of MSRs |
$ | 6,791 | $ | 6,397 | ||||
Weighted average life (in years) |
6.5 | 6.1 | ||||||
Prepayment speeds (constant prepayment rate)* |
9.2 |
% |
10.3 |
% |
||||
Impact on fair value: |
||||||||
10% adverse change |
$ | (135 |
) |
$ | (194 |
) |
||
20% adverse change |
$ | (288 |
) |
$ | (394 |
) |
||
Discount rate |
9.55 |
% |
9.55 |
% |
||||
Impact on fair value: |
||||||||
10% adverse change |
$ | (249 |
) |
$ | (225 |
) |
||
20% adverse change |
$ | (480 |
) |
$ | (434 |
) |
* Represents the weighted average prepayment rate for the life of the MSR asset.
At March 31, 2018 and December 31, 2017 the fair value of the MSRs was $6.8 million and $6.4 million, respectively. The fair value of the MSRs for these dates was determined using values obtained from a third party which utilizes a valuation model which calculates the present value of estimated future servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates. Mortgage loan prepayment speed is the annual rate at which borrowers are forecasted to repay their mortgage loan principal and is based on historical experience. The discount rate is used to determine the present value of future net servicing income. Another key assumption in the model is the required rate of return the market would expect for an asset with similar risk. These assumptions can, and generally will, change quarterly valuations as market conditions and interest rates change. Management reviews, annually, the process utilized by its independent third-party valuation experts.
These assumptions and sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which could magnify or counteract the sensitivities.
Note 7 - Goodwill and Other Intangibles
The following table presents activity in the Corporation's goodwill by its reporting units and finite-lived and indefinite-lived intangible assets, other than MSRs, for the three months ended March 31, 2018:
(dollars in thousands) |
Balance December 31, 2017 |
Adjustments |
Amortization |
Balance March 31, 2018 |
Amortization |
||||||||||||||
Goodwill – Wealth |
$ | 20,412 | $ | — | $ | — | $ | 20,412 |
Indefinite |
||||||||||
Goodwill – Banking |
153,545 | 2,311 | — | 155,856 |
Indefinite |
||||||||||||||
Goodwill – Insurance |
5,932 | — | — | 5,932 |
Indefinite |
||||||||||||||
Total Goodwill |
$ | 179,889 | $ | 2,311 | $ | — | $ | 182,200 | |||||||||||
Core deposit intangible |
$ | 7,380 | $ | — | $ | (377 |
) |
$ | 7,003 |
10 Years |
|||||||||
Customer relationships |
14,173 | — | (404 |
) |
13,769 | 10 |
to |
20 Years | |||||||||||
Non-compete agreements |
1,319 | — | (61 |
) |
1,258 | 5 |
to |
10 Years | |||||||||||
Trade name |
2,322 | — | (16 |
) |
2,306 | 3 Years |
to |
Indefinite | |||||||||||
Domain name |
151 | — | — | 151 |
Indefinite |
||||||||||||||
Favorable lease assets |
621 | — | (21 |
) |
600 | 1 |
to |
16 Years | |||||||||||
Total Intangible Assets |
$ | 25,966 | $ | — | $ | (879 |
) |
$ | 25,087 | ||||||||||
Grand Total |
$ | 205,855 | $ | 2,311 | $ | (879 |
) |
$ | 207,287 |
Management conducted its annual impairment tests for goodwill and indefinite-lived intangible assets as of October 31, 2017 using generally accepted valuation methods. Management determined that no impairment of goodwill or indefinite-lived intangible assets was identified as a result of the annual impairment analyses. Future impairment testing will be conducted each October 31, unless a triggering event occurs in the interim that would suggest possible impairment, in which case it would be tested as of the date of the triggering event. For the five months ended March 31, 2018, management determined there were no events that would necessitate impairment testing of goodwill or indefinite-lived intangible assets.
Note 8 - Deposits
The following table details the components of deposits:
March 31, 2018 |
December 31, 2017 |
|||||||
(dollars in thousands) |
||||||||
Interest-bearing demand |
$ | 529,478 | $ | 481,336 | ||||
Money market |
856,072 | 862,639 | ||||||
Savings |
308,925 | 338,572 | ||||||
Retail time deposits |
523,138 | 532,202 | ||||||
Wholesale non-maturity deposits |
63,449 | 62,276 | ||||||
Wholesale time deposits |
171,359 | 171,929 | ||||||
Total interest-bearing deposits |
2,452,421 | 2,448,954 | ||||||
Non-interest-bearing deposits |
863,118 | 924,844 | ||||||
Total deposits |
$ | 3,315,539 | $ | 3,373,798 |
Note 9 - Short-Term Borrowings and Long-Term FHLB Advances
A. Short-term borrowings
The Corporation’s short-term borrowings (original maturity of one year or less), which consist of funds obtained from overnight repurchase agreements with commercial customers, FHLB advances with original maturities of one year or less and overnight fed funds, are detailed below.
A summary of short-term borrowings is as follows:
(dollars in thousands) |
March 31, 2018 |
December 31, 2017 |
||||||
Repurchase agreements* – commercial customers |
$ | 13,804 | $ | 25,865 | ||||
Short-term FHLB advances |
159,900 | 212,000 | ||||||
Total short-term borrowings |
$ | 173,704 | $ | 237,865 |
* Overnight repurchase agreements with no expiration date
The following table sets forth information concerning short-term borrowings:
Three Months Ended March 31, |
||||||||
(dollars in thousands) |
2018 |
2017 |
||||||
Balance at period-end |
$ | 173,704 | $ | 23,613 | ||||
Maximum amount outstanding at any month end |
$ | 173,704 | $ | 39,378 | ||||
Average balance outstanding during the period |
$ | 172,532 | $ | 47,603 | ||||
Weighted-average interest rate: |
||||||||
As of the period-end |
1.76 |
% |
0.10 |
% |
||||
Paid during the period |
1.48 |
% |
0.23 |
% |
Average balances outstanding during the year represent daily average balances and average interest rates represent interest expense divided by the related average balance.
B. Long-term FHLB Advances
As of March 31, 2018 and December 31, 2017, the Corporation had $107.8 million and $139.1 million, respectively, of long-term FHLB advances (original maturities exceeding one year).
The following table presents the remaining periods until maturity of long-term FHLB advances:
(dollars in thousands) |
March 31, 2018 |
December 31, 2017 |
||||||
Within one year |
$ | 52,377 | $ | 83,766 | ||||
Over one year through five years |
55,407 | 55,374 | ||||||
Total |
$ | 107,784 | $ | 139,140 |
The following table presents rate and maturity information on FHLB advances and other borrowings:
Maturity Range(1) |
Weighted |
Coupon Rate(1) |
Balance at |
|||||||||||||||||||||
Description |
From |
To |
Average Rate(1) |
From |
To |
March 31, 2018 |
December 31, 2017 |
|||||||||||||||||
Bullet maturity – fixed rate |
4/30/2018 |
8/24/2021 |
1.79 |
% |
1.18 |
% |
2.13 |
% |
97,784 | 118,131 | ||||||||||||||
Convertible-fixed(2) |
8/20/2018 |
8/20/2018 |
2.58 |
% |
2.58 |
% |
2.58 |
% |
10,000 | 21,009 | ||||||||||||||
Total |
$ | 107,784 | $ | 139,140 |
(1) Maturity range, weighted average rate and coupon rate range refers to March 31, 2018 balances.
(2) FHLB advances whereby the FHLB has the option, at predetermined times, to convert the fixed interest rate to an adjustable interest rate indexed to the London Interbank Offered Rate (“LIBOR”). The Corporation has the option to prepay these advances, without penalty, if the FHLB elects to convert the interest rate to an adjustable rate. As of March 31, 2018, substantially all FHLB advances with this convertible feature are subject to conversion in fiscal 2018. These advances are included in the maturity ranges in which they mature, rather than the period in which they are subject to conversion.
C. Other Borrowings Information
In connection with its FHLB borrowings, the Corporation is required to hold the capital stock of the FHLB. The amount of capital stock held was $15.5 million at March 31, 2018, and $20.1 million at December 31, 2017. The carrying amount of the FHLB stock approximates its redemption value.
The level of required investment in FHLB stock is based on the balance of outstanding borrowings the Corporation has from the FHLB. Although FHLB stock is a financial instrument that represents an equity interest in the FHLB, it does not have a readily determinable fair value. FHLB stock is generally viewed as a long-term investment. Accordingly, when evaluating FHLB stock for impairment, its value should be determined based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.
The Corporation had a maximum borrowing capacity with the FHLB of $1.67 billion as of March 31, 2018 of which the unused capacity was $1.40 billion. In addition, there were $79.0 million in the overnight federal funds line available and $138.2 million of Federal Reserve Discount Window capacity.
Note 10 – Subordinated Notes
On December 13, 2017, the Corporation completed the issuance of $70.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2027 (the "2027 Notes") in an underwritten public offering. On August 6, 2015, the Corporation completed the issuance of $30 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2025 (the "2025 Notes") in a private placement transaction to institutional accredited investors. The net proceeds of both offerings increased Tier II regulatory capital at the Corporation level.
The following tables detail the subordinated notes, including debt issuance costs, as of March 31, 2018 and December 31, 2017:
March 31, 2018 |
December 31, 2017 |
|||||||||||||||
(dollars in thousands) |
Balance |
Rate(1)(2) |
Balance |
Rate(1)(2) |
||||||||||||
Subordinated Notes – due 2027 |
$ | 68,848 | 4.25 |
% |
$ | 68,829 | 4.25 |
% |
||||||||
Subordinated Notes – due 2025 |
29,600 | 4.75 |
% |
29,587 | 4.75 |
% |
||||||||||
Total Subordinated Notes |
$ | 98,448 | $ | 98,416 |
(1) The 2027 Notes bear interest at an annual fixed rate of 4.25% from the date of issuance until December 14, 2022, and will thereafter bear interest at a variable rate that will reset quarterly to a level equal to the then-current three-month LIBOR rate plus 2.050% until December 15, 2027, or any early redemption date.
(2) The 2025 Notes bear interest at an annual fixed rate of 4.75% from the date of issuance until August 14, 2020, and will thereafter bear interest at a variable rate that will reset quarterly to a level equal to the then-current three-month LIBOR rate plus 3.068% until August 15, 2025, or any early redemption date.
Note 11 – Junior Subordinated Debentures
In connection with the RBPI Merger, the Corporation acquired Royal Bancshares Capital Trust I (“Trust I”) and Royal Bancshares Capital Trust II (“Trust II”) (collectively, the “Trusts”), which were utilized for the sole purpose of issuing and selling capital securities representing preferred beneficial interests. Although the Corporation owns $774,000 of the common securities of Trust I and Trust II, the Trusts are not consolidated into the Corporation’s Consolidated Financial Statements as the Corporation is not deemed to be the primary beneficiary of these entities. In connection with the issuance and sale of the capital securities, RBPI issued, and the Corporation assumed as a result of the RBPI Merger, junior subordinated debentures to the Trusts of $10.7 million each, totaling $21.4 million representing the Corporation’s maximum exposure to loss. The junior subordinated debentures incur interest at a coupon rate of 3.74% as of December 31, 2017. The rate resets quarterly based on 3-month LIBOR plus 2.15%.
Each of Trust I and Trust II issued an aggregate principal amount of $12.5 million of capital securities initially bearing fixed and/or fixed/floating interest rates corresponding to the debt securities held by each trust to an unaffiliated investment vehicle and an aggregate principal amount of $387 thousand of common securities bearing fixed and/or fixed/floating interest rates corresponding to the debt securities held by each trust to the Corporation. As a result of the RBPI Merger, the Corporation has fully and unconditionally guaranteed all of the obligations of the Trusts, including any distributions and payments on liquidation or redemption of the capital securities.
The rights of holders of common securities of the Trusts are subordinate to the rights of the holders of capital securities only in the event of a default; otherwise, the common securities’ economic and voting rights are pari passu with the capital securities. The capital and common securities of the Trusts are subject to mandatory redemption upon the maturity or call of the junior subordinated debentures held by each. Unless earlier dissolved, the Trusts will dissolve on December 15, 2034. The junior subordinated debentures are the sole assets of Trusts, mature on December 15, 2034, and may be called at par by the Corporation any time after December 15, 2009. The Corporation records its investments in the Trusts’ common securities of $387,000 each as investments in unconsolidated entities and records dividend income upon declaration by Trust I and Trust II.
Note 12 – Derivative Instruments and Hedging Activities
Derivative financial instruments involve, to varying degrees, interest rate, market and credit risk. The Corporation manages these risks as part of its asset and liability management process and through credit policies and procedures. The Corporation seeks to minimize counterparty credit risk by establishing credit limits and collateral agreements and utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. The derivative transactions entered into by the Corporation are an economic hedge of a derivative offerings to Bank customers. The Corporation does not use derivative financial instruments for trading purposes.
Customer Derivatives – Interest Rate Swaps. The Corporation enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Corporation originates variable-rate loans with customers in addition to interest rate swap agreements, which serve to effectively swap the customers’ variable-rate loans into fixed-rate loans. The Corporation then enters into corresponding swap agreements with swap dealer counterparties to economically hedge its exposure on the variable and fixed components of the customer agreements. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC 815 and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. As of March 31, 2018, there were no fair value adjustments related to credit quality.
Risk Participation Agreements. The Corporation may enter into a risk participation agreement (“RPA”) with another institution as a means to assume a portion of the credit risk associated with a loan structure which includes a derivative instrument, in exchange for fee income commensurate with the risk assumed. This type of derivative is referred to as an “RPA sold”. In addition, in an effort to reduce the credit risk associated with an interest rate swap agreement with a borrower for whom the Corporation has provided a loan structured with a derivative, the Corporation may purchase a risk participation agreement from an institution participating in the facility in exchange for a fee commensurate with the risk shared. This type of derivative is referred to as an “RPA purchased”.
The following tables detail the derivative instruments as of March 31, 2018 and December 31, 2017:
Asset Derivatives |
Liability Derivatives |
|||||||||||||||
(dollars in thousands) |
Notional Amount |
Fair Value |
Notional Amount |
Fair Value |
||||||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||
As of March 31, 2018: |
||||||||||||||||
Customer derivatives – interest rate swaps |
$ | 158,973 | $ | 2,847 | $ | 158,973 | $ | 2,846 | ||||||||
Risk participation agreements sold |
— | — | 892 | 2 | ||||||||||||
Risk participation agreements purchased |
14,672 | 13 | — | — | ||||||||||||
Total derivatives |
$ | 173,645 | $ | 2,860 | $ | 159,865 | $ | 2,848 | ||||||||
As of December 31, 2017: |
||||||||||||||||
Customer derivatives – interest rate swaps |
$ | 124,627 | $ | 1,895 | $ | 124,627 | $ | 1,895 | ||||||||
Risk participation agreements sold |
— | — | 899 | 3 | ||||||||||||
Risk participation agreements purchased |
14,710 | 21 | — | — | ||||||||||||
Total derivatives |
$ | 139,337 | $ | 1,916 | $ | 125,526 | $ | 1,898 |
The Corporation has International Swaps and Derivatives Association agreements with third parties that requires a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with the third party at March 31, 2018 and December 31, 2017 was $0 and $1.3 million, respectively. The amount of collateral posted with the third party is deemed to be sufficient to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures. The aggregate fair value of all derivative financial instruments in a liability position with credit measure contingencies and entered into with the third party was $1.1 million and $1.6 million as of March 31, 2018 and December 31, 2017, respectively.
Note 13 - Accounting for Uncertainty in Income Taxes
The Corporation recognizes the financial statement benefit of a tax position only after determining that the Corporation would be more likely than not to sustain the position following an examination. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon settlement with the relevant tax authority.
The Corporation is subject to income taxes in the United States federal jurisdiction and multiple state jurisdictions. The Corporation is no longer subject to U.S. federal income tax examination by taxing authorities for years before 2014.
The Corporation’s policy is to record interest and penalties on uncertain tax positions as income tax expense. No interest or penalties were accrued for the three months ended March 31, 2018 or 2017.
Note 14 - Shareholders’ Equity
Dividend
On April 19, 2018, the Corporation’s Board of Directors declared a regular quarterly dividend of $0.22 per share payable June 1, 2018 to shareholders of record as of May 1, 2018. During the first quarter of 2018, the Corporation paid or accrued, as applicable, a regular quarterly dividend of $0.22 per share. This dividend totaled $4.5 million, based on outstanding shares and restricted stock units as of February 9, 2018 of 20,414,046 shares.
S-3 Shelf Registration Statement and Offerings Thereunder
In March 2015, the Corporation filed a shelf registration statement on Form S-3, SEC File No. 333-202805 (the “Shelf Registration Statement”). The Shelf Registration Statement expired in April 2018 and is expected to be replaced by a new shelf registration soon. As of March 31, 2018, the Shelf Registration Statement allowed the Corporation to raise additional capital through offers and sales of registered securities consisting of common stock, debt securities, warrants to purchase common stock, stock purchase contracts and units or units consisting of any combination of the foregoing securities. Using the prospectus in the Shelf Registration Statement, together with applicable prospectus supplements, the Corporation could sell, from time to time, in one or more offerings, such securities in a dollar amount up to $200 million, in the aggregate.
In addition, the Corporation has in place a Dividend Reinvestment and Stock Purchase Plan (the “Plan”), which allows it to issue up to 1,500,000 shares of registered common stock. The Plan allows for the grant of a request for waiver (“RFW”) above the Plan’s maximum investment of $120 thousand per account per year. An RFW is granted based on a variety of factors, including the Corporation’s current and projected capital needs, prevailing market prices of the Corporation’s common stock and general economic and market conditions.
For the three months ended March 31, 2018, the Corporation did not issue any shares through the Plan. No RFWs were approved during the three months ended March 31, 2018. No other sales of equity securities were executed under the Shelf Registration Statement during the three months ended March 31, 2018.
Option Exercises and Restricted Stock Awards
In addition to shares that may be issued through the Plan, the Corporation also issues shares through the exercise of stock options and the vesting of RSUs and PSUs. During the three months ended March 31, 2018, 43,925 shares were issued pursuant to the exercise of stock options, increasing shareholders’ equity by $992 thousand. The increase in shareholders’ equity related to the vesting of the RSUs and PSUs, which is recognized over the vesting period through stock based compensation expense, was $620 thousand.
Stock Repurchases
On August 6, 2015, the Corporation announced a stock repurchase program (the “2015 Program”) under which the Corporation may repurchase up to 1,200,000 shares of the Corporation’s common stock, at an aggregate purchase price not to exceed $40 million. During the three months ended March 31, 2018, no shares were repurchased under the 2015 Program. As of March 31, 2018, the maximum number of shares remaining authorized for repurchase under the 2015 Program was 189,300. In addition to the 2015 Program, it is the Corporation’s practice to retire shares to its treasury account upon the vesting of stock awards to certain officers in order to cover the statutory income tax withholdings related to such vestings.
Note 15 – Accumulated Other Comprehensive Income (Loss)
The following table details the components of accumulated other comprehensive (loss) income for the three month period March 31, 2018 and 2017:
(dollars in thousands) |
Net Change in Unrealized Gains on Available-for- Sale Investment Securities |
Net Change in Unfunded Pension Liability |
Accumulated Other Comprehensive Loss |
|||||||||
Balance, December 31, 2017 |
$ | (2,861 |
) |
$ | (1,553 |
) |
$ | (4,414 |
) |
|||
Other comprehensive (loss) income |
(5,296 |
) |
46 | (5,250 |
) |
|||||||
Balance, March 31, 2018 |
$ | (8,157 |
) |
$ | (1,507 |
) |
$ | (9,664 |
) |
|||
Balance, December 31, 2016 |
$ | (1,231 |
) |
$ | (1,178 |
) |
$ | (2,409 |
) |
|||
Other comprehensive income |
387 | 32 | 419 | |||||||||
Balance, March 31, 2017 |
$ | (844 |
) |
$ | (1,193 |
) |
$ | (1,990 |
) |
The following table details the amounts reclassified from each component of accumulated other comprehensive loss to each component’s applicable income statement line, for the three months ended March 31, 2018 and 2017:
Description of Accumulated Other |
Amount Reclassified from Accumulated Other Comprehensive Loss |
|
|||||||
Comprehensive Loss Component |
Three Months Ended March 31, |
Affected Income Statement Category | |||||||
2018 |
2017 |
||||||||
Net unrealized gain on investment securities available for sale: |
|||||||||
Realization of gain on sale of investment securities available for sale |
$ | (7 | ) | $ | (1 |
) |
Net gain on sale of available for sale investment securities |
||
Realization of gain on transfer of investment securities available for sale to trading |
(417 |
) |
— |
Other operating income |
|||||
Total |
$ | (424 |
) |
$ | (1 |
) |
|||
Income tax effect |
89 | — |
Income tax expense |
||||||
Net of income tax |
$ | (335 |
) |
$ | (1 |
) |
Net income |
||
Unfunded pension liability: |
|||||||||
Amortization of net loss included in net periodic pension costs* |
$ | 25 | $ | 23 |
Other operating expenses |
||||
Income tax effect |
(5 |
) |
(8 |
) |
Income tax expense |
||||
Net of income tax |
$ | 20 | $ | 15 |
Net income |
*Accumulated other comprehensive loss components are included in the computation of net periodic pension cost.
Note 16 - Earnings per Common Share
Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per common share takes into account the potential dilution that would occur if in-the-money stock options were exercised and converted into common shares and restricted stock awards and performance-based stock awards were vested. Proceeds assumed to have been received on option exercises are assumed to be used to purchase shares of the Corporation’s common stock at the average market price during the period, as required by the treasury stock method of accounting. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive.
Three Months Ended March 31, |
||||||||
(dollars in thousands except per share data) |
2018 |
2017 |
||||||
Numerator: |
||||||||
Net income available to common shareholders |
$ | 15,286 | $ | 9,044 | ||||
Denominator for basic earnings per share – weighted average shares outstanding |
20,202,969 | 16,954,132 | ||||||
Effect of dilutive common shares |
247,525 | 228,557 | ||||||
Denominator for diluted earnings per share – adjusted weighted average shares outstanding |
20,450,494 | 17,182,689 | ||||||
Basic earnings per share |
$ | 0.76 | $ | 0.53 | ||||
Diluted earnings per share |
$ | 0.75 | $ | 0.53 | ||||
Antidilutive shares excluded from computation of average dilutive earnings per share |
870 | — |
Note 17 - Revenue from Contracts with Customers
All of the Corporation’s revenue from contracts with customers in the scope of ASC 606 is recognized within noninterest income. The following table presents the Corporation’s noninterest income by revenue stream and reportable segment for the three months ended March 31, 2018 and 2017. Items outside the scope of ASC 606 are noted as such.
Three Months Ended March 31, 2018 |
Three Months Ended March 31, 2017 |
|||||||||||||||||||||||
(dollars in thousands) |
Banking |
Wealth Management |
Consolidated |
Banking |
Wealth Management |
Consolidated |
||||||||||||||||||
Fees for wealth management services |
$ | — | $ | 10,308 | $ | 10,308 | $ | — | $ | 9,303 | $ | 9,303 | ||||||||||||
Insurance commissions(1) |
— | 1,693 | 1,693 | — | 763 | 763 | ||||||||||||||||||
Capital markets revenue(1) |
666 | — | 666 | — | — | — | ||||||||||||||||||
Service charges on deposit accounts |
713 | — | 713 | 647 | — | 647 | ||||||||||||||||||
Loan servicing and other fees(1) |
686 | — | 686 | 503 | — | 503 | ||||||||||||||||||
Net gain on sale of loans(1) |
518 | — | 518 | 629 | — | 629 | ||||||||||||||||||
Net gain on sale of investment securities available for sale(1) |
7 | — | 7 | 1 | — | 1 | ||||||||||||||||||
Net gain on sale of other real estate owned |
176 | — | 176 | — | — | — | ||||||||||||||||||
Dividends on FHLB and FRB stock(1) |
431 | — | 431 | 214 | — | 214 | ||||||||||||||||||
Other operating income(2) |
4,294 | 44 | 4,338 | 1,119 | 48 | 1,167 | ||||||||||||||||||
Total noninterest income |
$ | 7,491 | $ | 12,045 | $ | 19,536 | $ | 3,113 | $ | 10,114 | $ | 13,227 |
(1) Not within the scope of ASC 606.
(2) Other operating income includes merchant interchange fees, safe deposit box rentals, and rent income totaling $521 thousand and $479 thousand for the three-months ended March 31, 2018 and 2017, respectively, which are within the scope of ASC 606.
A description of the Corporation’s revenue streams accounted for under ASC 606 follows:
Service Charges on Deposit Accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.
Wealth Management Fees: The Corporation earns wealth management fee revenue from a variety of sources including fees from trust administration and other related fiduciary services, custody, investment management and advisory services, employee benefit account and IRA administration, estate settlement, tax service fees, shareholder service fees and brokerage.
Fees that are determined based on the market value of the assets held in their accounts are generally billed monthly, in arrears, based on the market value of assets at the end of the previous billing period. Other related services that are based on a fixed fee schedule are recognized when the services are rendered. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e. the trade date.
Included in other assets on the balance sheet is a receivable for wealth management fees that have been earned but not yet collected.
Interchange Income: The Corporation earns interchange income fees from debit cardholder transactions conducted through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.
Gains/Losses on Sales of OREO: The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.
Note 18 – Stock-Based Compensation
A. General Information
The Corporation permits the issuance of stock options, dividend equivalents, performance stock awards, stock appreciation rights and restricted stock units or awards to employees and directors of the Corporation under several plans. The performance awards and restricted awards may be in the form of stock awards or stock units. Stock awards and stock units differ in that for a stock award, shares of restricted stock are issued in the name of the grantee, whereas a stock unit constitutes a promise to issue shares of stock upon vesting. The accounting for awards and units is identical. The terms and conditions of awards under the plans are determined by the Corporation’s Management Development and Compensation Committee.
Prior to April 25, 2007, all shares authorized for grant as stock-based compensation were limited to grants of stock options. On April 25, 2007, the shareholders approved the Corporation’s “2007 Long-Term Incentive Plan” (the “2007 LTIP”) under which a total of 428,996 shares of the Corporation’s common stock were made available for award grants. On April 28, 2010, the shareholders approved the Corporation’s “2010 Long Term Incentive Plan” under which a total of 445,002 shares of the Corporation’s common stock were made available for award grants and on April 30, 2015, the shareholders approved an amendment and restatement of such plan (as amended and restated, the “2010 LTIP”) to, among other things, increase the number of shares available for award grants by 500,000 to 945,002.
In addition to the shareholder-approved plans mentioned in the preceding paragraph, the Corporation periodically authorizes grants of stock-based compensation as inducement awards to new employees. This type of award does not require shareholder approval in accordance with Rule 5635(c)(4) of the Nasdaq listing rules.
The equity awards are authorized to be in the form of, among others, options to purchase the Corporation’s common stock, restricted stock units (“RSUs”) and performance stock units (“PSUs”).
RSUs have a restriction based on the passage of time. The grant date fair value of the RSUs is based on the closing price on the date of the grant.
PSUs have a restriction based on a performance criteria and may also havea restriction based on the passage of time. The performance criteria may be a market-based criteria measured by the Corporation’s total shareholder return (“TSR”) relative to the performance of the community bank index for the respective period. The fair value of the PSUs based on the Corporation’s TSR relative to the performance of a designated peer group or the NASDAQ Community Bank Index is calculated using the Monte Carlo Simulation method. The performance criteria may also be based on a non-market-based criteria such as return on average equity relative to that designated peer group. The grant date fair value of these PSUs is based on the closing price of the Corporation’s stock on the date of the grant. PSU grants may have a vesting percent ranging from 0% to 150%.
B. Other Stock Option Information
The following table provides information about options outstanding for the three months ended March 31, 2018:
Shares |
Weighted Average Exercise Price |
Weighted Average Grant Date Fair Value |
||||||||||
Options outstanding, December 31, 2017 |
115,246 | $ | 20.73 | $ | 4.86 | |||||||
Forfeited |
— | $ | — | $ | — | |||||||
Expired |
— | $ | — | $ | — | |||||||
Exercised |
(43,925 |
) |
$ | 22.57 | $ | 5.03 | ||||||
Options outstanding, March 31, 2018 |
71,321 | $ | 19.59 | $ | 4.75 |
As of March 31, 2018 there were no unvested options.
Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows:
|
Three Months Ended March 31, |
|||||||
(dollars in thousands) |
2018 |
2017 |
||||||
Proceeds from exercise of stock options |
$ | 992 | $ | 650 | ||||
Related tax benefit recognized |
210 | 141 | ||||||
Net proceeds of options exercised |
$ | 1,202 | $ | 791 | ||||
Intrinsic value of options exercised |
$ | 999 | $ | 548 |
The following table provides information about options outstanding and exercisable at March 31, 2018:
(dollars in thousands, except exercise price) |
Outstanding |
Exercisable |
||||||
Number of shares |
71,321 | 71,321 | ||||||
Weighted average exercise price |
$ | 19.59 | $ | 19.59 | ||||
Aggregate intrinsic value |
$ | 1,737,209 | $ | 1,737,209 | ||||
Weighted average contractual term in years |
1.2 | 1.2 |
C. Restricted Stock and Performance Stock and Units
The Corporation has granted RSUs and PSUs under the 2007 LTIP and 2010 LTIP and in accordance with Rule 5635(c)(4) of the Nasdaq listing standards.
RSUs
The compensation expense for the RSUs is measured based on the market price of the stock on the day prior to the grant date and is recognized on a straight-line basis over the vesting period.
For the three months ended March 31, 2018, the Corporation recognized $288 thousand of expense related to the Corporation’s RSUs. As of March 31, 2018, there was $1.8 million of unrecognized compensation cost related to RSUs. This cost will be recognized over a weighted average period of 2.1 years.
The following table details the RSUs for the three months ended March 31, 2018:
Three Months Ended March 31, 2018 |
||||||||
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||
Beginning balance |
75,707 | $ | 35.80 | |||||
Granted |
2,400 | $ | 43.95 | |||||
Vested |
(1,000 |
) |
$ | 30.04 | ||||
Forfeited |
— | $ | — | |||||
Ending balance |
77,107 | $ | 36.13 |
PSUs
The Corporation recognized $332 thousand of expense related to the PSUs for the three months ended March 31, 2018. As of March 31, 2018, there was $2.1 million of unrecognized compensation cost related to PSUs. This cost will be recognized over a weighted average period of 1.5 years.
The following table details the PSUs for the three months ended March 31, 2018:
Three Months Ended March 31, 2018 |
||||||||
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||
Beginning balance |
168,453 | $ | 24.76 | |||||
Granted |
— | $ | — | |||||
Vested |
— | $ | — | |||||
Forfeited |
— | $ | — | |||||
Ending balance |
168,453 | $ | 24.76 |
Note 19 - Fair Value Measurement
FASB ASC 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FASB ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy under FASB ASC Topic 820 are:
Level 1 –Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active and model derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
A. Assets and liabilities measured on a recurring basis
A description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Investment Securities
The value of the Corporation’s available for sale investment securities, which include obligations of the U.S. government and its agencies, mortgage-backed securities issued by U.S. government- and U.S. government sponsored agencies, obligations of state and political subdivisions, corporate bonds and other debt securities are determined by the Corporation, taking into account the input of an independent third party valuation service provider. The third party’s evaluations are based on market data, utilizing pricing models that vary by asset and incorporate available trade, bid and other market information. For securities that do not trade on a daily basis, their pricing models apply available information such as benchmarking and matrix pricing. The market inputs normally sought in the evaluation of securities include benchmark yields, reported trades, broker/dealer quotes (only obtained from market makers or broker/dealers recognized as market participants), issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain securities, additional inputs may be used or some market inputs may not be applicable. Inputs are prioritized differently on any given day based on market conditions. Management reviews, annually, the process utilized by its independent third-party valuation service provider. On a quarterly basis, management tests the validity of the prices provided by the third party by selecting a representative sample of the portfolio and obtaining actual trade results, or if actual trade results are not available, competitive broker pricing. On an annual basis, management evaluates, for appropriateness, the methodology utilized by the independent third-party valuation service provider.
U.S. Government agencies are evaluated and priced using multi-dimensional relational models and option adjusted spreads. State and municipal securities are evaluated on a series of matrices including reported trades and material event notices. Mortgage-backed securities are evaluated using matrix correlation to treasury or floating index benchmarks, prepayment speeds, monthly payment information and other benchmarks. Other available-for-sale investments are evaluated using a broker-quote based application, including quotes from issuers.
Interest Rate Swaps and Risk Participation Agreements
The Corporation’s interest rate swaps and RPAs are reported at fair value utilizing Level 2 inputs. Prices of these instruments are obtained through an independent pricing source utilizing pricing information which may include market observed quotations for swaps, LIBOR rates, forward rates and rate volatility. When entering into a derivative contract, the Corporation is exposed to fair value changes due to interest rate movements, and the potential non-performance of our contract counterparty. The Corporation has developed a methodology to value the non-performance risk based on internal credit risk metrics and the unique characteristics of derivative instruments, which include notional exposure rather than principle at risk and interest payment netting. The results of this methodology are used to adjust the base fair value of the instrument for the potential counterparty credit risk.
The following tables present the Corporation’s assets measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017:
As of March 31, 2018 |
||||||||||||||||
(dollars in millions) |
Total |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. Treasury securities |
$ | 0.1 | $ | 0.1 | $ | — | $ | — | ||||||||
Obligations of U.S. government & agencies |
175.1 | — | 175.1 | — | ||||||||||||
Obligations of state & political subdivisions |
|
19.9 | — | 19.9 | — | |||||||||||
Mortgage-backed securities |
303.9 | — | 303.9 | — | ||||||||||||
Collateralized mortgage obligations |
34.0 | — | 34.0 | — | ||||||||||||
Other debt securities |
1.1 | — | 1.1 | — | ||||||||||||
Total investment securities available for sale |
$ | 534.1 | $ | 0.1 | $ | 534.0 | $ | — | ||||||||
Investment securities trading: |
||||||||||||||||
Mutual funds |
8.2 | 8.2 | — | — | ||||||||||||
Derivatives: |
||||||||||||||||
Interest rate swaps |
2.8 | — | 2.8 | — | ||||||||||||
Total recurring fair value measurements |
$ | 545.1 | $ | 8.3 | $ | 536.8 | $ | — |
As of December 31, 2017 |
||||||||||||||||
(dollars in millions) |
Total |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. Treasury securities |
$ | 200.1 | $ | 200.1 | $ | — | $ | — | ||||||||
Obligations of U.S. government & agencies |
151.0 | — | 151.0 | — | ||||||||||||
Obligations of state & political subdivisions |
21.3 | — | 21.3 | — | ||||||||||||
Mortgage-backed securities |
275.0 | — | 275.0 | — | ||||||||||||
Collateralized mortgage obligations |
36.7 | — | 36.7 | — | ||||||||||||
Mutual funds |
3.5 | 3.5 | — | — | ||||||||||||
Other debt securities |
1.6 | — | 1.6 | — | ||||||||||||
Total investment securities available for sale |
$ | 689.2 | $ | 203.6 | $ | 485.6 | $ | — | ||||||||
Investment securities trading: |
||||||||||||||||
Mutual funds |
4.6 | 4.6 | — | — | ||||||||||||
Derivatives: |
||||||||||||||||
Interest rate swaps |
1.9 | — | 1.9 | — | ||||||||||||
Total recurring fair value measurements |
$ | 695.7 | $ | 208.2 | $ | 487.5 | $ | — |
There have been no transfers between levels during the three months ended March 31, 2018.
B. Assets and liabilities measured on a non-recurring basis
Fair value is used on a nonrecurring basis to evaluate certain financial assets and financial liabilities in specific circumstances. Similarly, fair value is used on a nonrecurring basis for nonfinancial assets and nonfinancial liabilities such as foreclosed assets, other real estate owned, intangible assets, nonfinancial assets and liabilities evaluated in a goodwill impairment analysis and other nonfinancial assets measured at fair value for purposes of assessing impairment. A description of the valuation methodologies used for financial and nonfinancial assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy, is set forth below.
Impaired Loans
The Corporation evaluates and values impaired loans at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy. Each loan’s collateral has a unique appraisal and management’s discount of the value is based on the factors unique to each impaired loan. The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan, which range from 10% - 50%. Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on the appraisals by qualified licensed appraisers hired by the Corporation. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business.
The Corporation has an appraisal policy in which an appraisal is obtained for a commercial loan at the point at which the loan either becomes nonperforming or is downgraded to a substandard or worse classification. For consumer loans, the Corporation obtains updated appraisals when a loan becomes 90 days past due or when it receives other information that may indicate possible impairment. Based on the appraisals obtained by the Corporation, a partial or full charge-off may be necessary.
Other Real Estate Owned
Other real estate owned consists of properties acquired as a result of foreclosures and deeds in-lieu-of foreclosure. Properties are classified as OREO and are reported at the lower of cost or fair value less cost to sell, and are classified as Level 3 in the fair value hierarchy.
Mortgage Servicing Rights
MSRs do not trade in an active, open market with readily observable prices. Accordingly, the Corporation obtains the fair value of the MSRs using a third-party pricing provider. The provider determines the fair value by discounting projected net servicing cash flows of the remaining servicing portfolio. The valuation model used by the provider considers market loan prepayment predictions and other economic factors which the Corporation considers to be significant unobservable inputs. The fair value of MSRs is mostly affected by changes in mortgage interest rates since rate changes cause the loan prepayment acceleration factors to increase or decrease. All assumptions are market driven. The Corporation has a sufficient understanding of the third party service’s valuation models, assumptions and inputs used in determining the fair value of MSRs to enable management to maintain an appropriate system of internal control. Mortgage servicing rights are classified within Level 3 of the fair value hierarchy as the valuation is model driven and primarily based on unobservable inputs.
The following tables present the Corporation’s assets measured at fair value on a non-recurring basis as of March 31, 2018 and December 31, 2017:
As of March 31, 2018 |
||||||||||||||||
(dollars in millions) |
Total |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
Mortgage servicing rights |
$ | 6.8 | $ | — | $ | — | $ | 6.8 | ||||||||
Impaired loans and leases |
11.9 | — | — | 11.9 | ||||||||||||
OREO |
0.3 | — | — | 0.3 | ||||||||||||
Total non-recurring fair value measurements |
$ | 19.0 | $ | — | $ | — | $ | 19.0 |
Fair value of assets measured on a non-recurring basis as of December 31, 2017:
As of December 31, 2017 |
||||||||||||||||
(dollars in millions) |
Total |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
Mortgage servicing rights |
$ | 6.4 | $ | — | $ | — | $ | 6.4 | ||||||||
Impaired loans and leases |
14.0 | — | — | 14.0 | ||||||||||||
OREO |
0.3 | — | — | 0.3 | ||||||||||||
Total non-recurring fair value measurements |
$ | 20.7 | $ | — | $ | — | $ | 20.7 |
During the three months ended March 31, 2018, an increase of $29 thousand was recorded in the Allowance as a result of adjusting the carrying value and estimated fair value of the impaired loans in the above tables.
Note 20 - Fair Value of Financial Instruments
FASB ASC 825, “Disclosures about Fair Value of Financial Instruments” requires disclosure of the fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate such value. The methodologies for estimating the fair value of financial assets and financial liabilities measured at fair value on a recurring and non-recurring basis are discussed above. The estimated fair value amounts have been determined by the Corporation using available market information and appropriate valuation methodologies and are based on the exit price notion set forth by ASU 2016-01 effective January 1, 2018 and applied to this disclosure on a prospective basis. Estimated fair value of assets and liabilities carried at cost at December 31, 2017 were based on an entry price notion. In cases where quoted market prices are not available, fair values are based on estimates using present value or other market value techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The aggregate fair value amounts presented below do not represent the underlying value of the Corporation.
The carrying amount and fair value of the Corporation’s financial instruments are as follows:
As of March 31, 2018 |
As of December 31, 2017 |
|||||||||||||||||
(dollars in thousands) |
Fair Value Hierarchy Level* |
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
|||||||||||||
Financial assets: |
||||||||||||||||||
Cash and cash equivalents |
Level 1 |
$ | 32,393 | $ | 32,393 | $ | 60,024 | $ | 60,024 | |||||||||
Investment securities - available for sale |
See Note 19 |
534,103 | 534,103 | 689,202 | 689,202 | |||||||||||||
Investment securities - trading |
See Note 19 |
8,211 | 8,211 | 4,610 | 4,610 | |||||||||||||
Investment securities – held to maturity |
Level 2 |
7,885 | 7,629 | 7,932 | 7,851 | |||||||||||||
Loans held for sale |
Level 2 |
5,522 | 5,522 | 3,794 | 3,794 | |||||||||||||
Net portfolio loans and leases |
Level 3 |
3,288,133 | 3,249,948 | 3,268,333 | 3,293,802 | |||||||||||||
Mortgage servicing rights |
Level 3 |
5,706 | 6,791 | 5,861 | 6,397 | |||||||||||||
Interest rate swaps |
Level 2 |
2,847 | 2,847 | 1,895 | 1,895 | |||||||||||||
Risk participation agreements purchased |
Level 2 |
13 | 13 | 21 | 21 | |||||||||||||
Other assets |
Level 3 |
39,740 | 39,740 | 46,799 | 46,799 | |||||||||||||
Total financial assets |
$ | 3,924,553 | $ | 3,887,197 | $ | 4,088,471 | $ | 4,114,395 | ||||||||||
Financial liabilities: |
||||||||||||||||||
Deposits |
Level 2 |
$ | 3,315,539 | $ | 3,309,113 | $ | 3,373,798 | $ | 3,368,276 | |||||||||
Short-term borrowings |
Level 2 |
173,704 | 173,704 | 237,865 | 237,865 | |||||||||||||
Long-term FHLB advances |
Level 2 |
107,784 | 106,857 | 139,140 | 138,685 | |||||||||||||
Subordinated notes |
Level 2 |
98,448 | 97,074 | 98,416 | 95,044 | |||||||||||||
Junior subordinated debentures |
Level 2 |
21,456 | 22,901 | 21,416 | 19,366 | |||||||||||||
Interest rate swaps |
Level 2 |
2,846 | 2,846 | 1,895 | 1,895 | |||||||||||||
Risk participation agreements sold |
Level 2 |
2 | 2 | 3 | 3 | |||||||||||||
Other liabilities |
Level 3 |
47,535 | 47,535 | 49,071 | 49,071 | |||||||||||||
Total financial liabilities |
$ | 3,767,314 | $ | 3,760,032 | $ | 3,921,604 | $ | 3,910,205 |
* See Note 19 in the Notes to Unaudited Consolidated Financial Statements for a description of hierarchy levels.
Note 21 - Financial Instruments with Off-Balance Sheet Risk, Contingencies and Concentration of Credit Risk
Off-Balance Sheet Risk
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statements of financial condition. The contractual amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.
The Corporation’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument of commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments.
Commitments to extend credit, which include unused lines of credit and unfunded commitments to originate loans, are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Some of the commitments are expected to expire without being drawn upon, and the total commitment amounts do not necessarily represent future cash requirements. Total commitments to extend credit at March 31, 2018 and December 31, 2017 were $766.4 million and $748.3 million, respectively. Management evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on a credit evaluation of the counterparty. Collateral varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, residential real estate, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in extending loan facilities to customers. The collateral varies, but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and residential real estate for those commitments for which collateral is deemed necessary. The Corporation’s obligation under standby letters of credit as of March 31, 2018 and December 31, 2017 were $15.5 million and $17.0 million, respectively. There were no outstanding bankers’ acceptances as of March 31, 2018 and December 31, 2017.
Contingencies
Legal Matters
In the ordinary course of its operations, the Corporation and its subsidiaries are parties to various claims, litigation, investigations, and legal and administrative cases and proceedings. Such threatened claims, litigation, investigations, legal and administrative cases and proceedings typically entail matters that are considered incidental to the normal conduct of business. Claims for significant monetary damages may be asserted in many of these types of legal actions. Based on the information currently available, the Corporation believes it has meritorious defenses to the claims asserted against it in its currently outstanding legal proceedings and with respect to such legal proceedings, intends to continue to defend itself vigorously, litigating or settling cases according to management’s judgment as to what is in the best interests of the Corporation and its shareholders.
On a regular basis, liabilities and contingencies in connection with outstanding legal proceedings are assessed utilizing the latest information available. For those matters where it is probable that the Corporation will incur a loss and the amount of the loss can be reasonably estimated, a liability may be recorded in the Consolidated Financial Statements. These legal reserves may be increased or decreased to reflect any relevant developments on at least a quarterly basis. For other matters, where a loss is not probable or the amount or range of the loss is not estimable, legal reserves are not accrued. While the outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel and available insurance coverage, management believes that the established legal reserves are adequate and the liabilities arising from legal proceedings will not have a material adverse effect on the consolidated financial position, consolidated results of operations or consolidated cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the consolidated financial position, consolidated results of operations or consolidated cash flows of the Corporation.
Indemnifications
In general, the Corporation does not sell loans with recourse, except to the extent that it arises from standard loan-sale contract provisions. These provisions cover violations of representations and warranties and, under certain circumstances, first payment default by borrowers. These indemnifications may include the repurchase of loans by the Corporation, and are considered customary provisions in the secondary market for conforming mortgage loan sales. As of March 31, 2018, there are no pending make-whole requests. As of March 31, 2018, the Corporation had no loans sold with recourse outstanding.
Concentrations of Credit Risk
The Corporation has a material portion of its loans in real estate-related loans. A predominant percentage of the Corporation’s real estate exposure, both commercial and residential, is in the Corporation’s primary trade area which includes portions of Delaware, Chester, Montgomery and Philadelphia counties in Southeastern Pennsylvania. Management is aware of this concentration and attempts to mitigate this risk to the extent possible in many ways, including the underwriting and assessment of borrower’s capacity to repay. See Note 5 – “Loans and Leases” for additional information.
Note 22 - Segment Information
FASB Codification 280 – “Segment Reporting” identifies operating segments as components of an enterprise which are evaluated regularly by the Corporation’s chief operating decision maker, our Chief Executive Officer, in deciding how to allocate resources and assess performance. The Corporation has applied the aggregation criterion set forth in this codification to the results of its operations.
The Corporation’s Banking segment consists of commercial and retail banking. The Banking segment is evaluated as a single strategic unit which generates revenues from a variety of products and services. The Banking segment generates interest income from its lending (including leases) and investing activities and is dependent on the gathering of lower cost deposits from its branch network or borrowed funds from other sources for funding its loans, resulting in the generation of net interest income. The Banking segment also derives revenues from other sources including gains on the sale in available for sale investment securities, gains on the sale of residential mortgage loans, service charges on deposit accounts, cash sweep fees, overdraft fees, BOLI income and interchange revenue associated with its Visa Check Card offering. Also included in the Banking segment are two subsidiaries of the Bank, KCMI Capital, Inc. and Bryn Mawr Equipment Financing, Inc., both of which provide specialized lending solutions to our customers.
The Wealth Management segment has responsibility for a number of activities within the Corporation, including trust administration, other related fiduciary services, custody, investment management and advisory services, employee benefits and IRA administration, estate settlement, tax services and brokerage. Bryn Mawr Trust of Delaware and Lau Associates are included in the Wealth Management segment of the Corporation since they have similar economic characteristics, products and services to those of the Wealth Management Division of the Corporation. BMT Investment Advisers, formed in May 2017, which serves as investment adviser to BMT Investment Funds, a Delaware statutory trust, is also reported under the Wealth Management segment. In addition, the Wealth Management Division oversees all insurance services of the Corporation, which are conducted through the Bank’s insurance subsidiary, BMT Insurance Advisors, Inc., and are reported in the Wealth Management segment.
The accounting policies of the Corporation are applied by segment in the following tables. The segments are presented on a pre-tax basis.
The following table details the Corporation’s segments for the three months ended March 31, 2018 and 2017:
Three Months Ended March 31, 2018 |
Three Months Ended March 31, 2017 |
|||||||||||||||||||||||
(dollars in thousands) |
Banking |
Wealth Management |
Consolidated |
Banking |
Wealth Management |
Consolidated |
||||||||||||||||||
Net interest income |
$ | 37,438 | $ | 1 | $ | 37,439 | $ | 27,402 | $ | 1 | $ | 27,403 | ||||||||||||
Less: loan loss provision |
1,030 | — | 1,030 | 291 | — | 291 | ||||||||||||||||||
Net interest income after loan loss provision |
36,408 | 1 | 36,409 | 27,111 | 1 | 27,112 | ||||||||||||||||||
Other income: |
||||||||||||||||||||||||
Fees for wealth management services |
— | 10,308 | 10,308 | — | 9,303 | 9,303 | ||||||||||||||||||
Insurance commissions |
— | 1,693 | 1,693 | — | 763 | 763 | ||||||||||||||||||
Capital markets revenue |
666 | — | 666 | — | — | — | ||||||||||||||||||
Service charges on deposit accounts |
713 | — | 713 | 647 | — | 647 | ||||||||||||||||||
Loan servicing and other fees |
686 | — | 686 | 503 | — | 503 | ||||||||||||||||||
Net gain on sale of loans |
518 | — | 518 | 629 | — | 629 | ||||||||||||||||||
Net gain (loss) on sale of investment securities available for sale |
7 | — | 7 | 1 | — | 1 | ||||||||||||||||||
Net (loss) gain on sale of OREO |
176 | — | 176 | — | — | — | ||||||||||||||||||
Other operating income |
4,725 | 44 | 4,769 | 1,333 | 48 | 1,381 | ||||||||||||||||||
Total noninterest income |
7,491 | 12,045 | 19,536 | 3,113 | 10,114 | 13,227 | ||||||||||||||||||
Noninterest expenses: |
||||||||||||||||||||||||
Salaries & wages |
11,156 | 4,826 | 15,982 | 8,630 | 3,820 | 12,450 | ||||||||||||||||||
Employee benefits |
2,676 | 1,032 | 3,708 | 1,557 | 932 | 2,489 | ||||||||||||||||||
Occupancy and bank premise |
2,576 | 474 | 3,050 | 2,127 | 399 | 2,526 | ||||||||||||||||||
Amortization of intangible assets |
398 | 481 | 879 | 353 | 340 | 693 | ||||||||||||||||||
Professional fees |
729 | 19 | 748 | 681 | 30 | 711 | ||||||||||||||||||
Other operating expenses |
10,431 | 1,232 | 11,663 | 6,765 | 1,026 | 7,791 | ||||||||||||||||||
Total noninterest expenses |
27,966 | 8,064 | 36,030 | 20,113 | 6,547 | 26,660 | ||||||||||||||||||
Segment profit |
15,933 | 3,982 | 19,915 | 10,111 | 3,568 | 13,679 | ||||||||||||||||||
Intersegment (revenues) expenses* |
(149 |
) |
149 | — | (112 |
) |
112 | — | ||||||||||||||||
Pre-tax segment profit after eliminations |
$ | 15,784 | $ | 4,131 | $ | 19,915 | $ | 9,999 | $ | 3,680 | $ | 13,679 | ||||||||||||
% of segment pre-tax profit after eliminations |
79.3 |
% |
20.7 |
% |
100.0 |
% |
73.1 |
% |
26.9 |
% |
100.0 |
% |
||||||||||||
Segment assets (dollars in millions) |
$ | 4,248.4 | $ | 52.0 | $ | 4,300.4 | $ | 3,247 | $ | 46 | $ | 3,293 |
* Inter-segment revenues consist of rental payments, interest on deposits and management fees.
Wealth Management Segment Information
(dollars in millions) |
March 31, 2018 |
December 31, 2017 |
||||||
Assets under management, administration, supervision and brokerage |
$ | 13,146.9 | $ | 12,968.7 |
ITEM 2 Management’s Discussion and Analysis of Results of Operation and Financial Condition
The following is the Corporation’s discussion and analysis of the significant changes in the financial condition, results of operations, capital resources and liquidity presented in the accompanying Consolidated Financial Statements. Current performance does not guarantee, and may not be indicative of, similar performance in the future.
Brief History of the Corporation
The Bryn Mawr Trust Company (the “Bank”) received its Pennsylvania banking charter in 1889 and is a member of the Federal Reserve System. In 1986, Bryn Mawr Bank Corporation (the “Corporation”) was formed and on January 2, 1987, the Bank became a wholly-owned subsidiary of the Corporation. The Bank and Corporation are headquartered in Bryn Mawr, Pennsylvania, a western suburb of Philadelphia. The Corporation and its subsidiaries offer a full range of personal and business banking services, consumer and commercial loans, equipment leasing, mortgages, insurance and wealth management services, including investment management, trust and estate administration, retirement planning, custody services, and tax planning and preparation from 37 full-service branches, eight limited-hour retirement community offices, two limited-service branches, six wealth management offices and a full-service insurance agency located throughout Montgomery, Delaware, Chester, Philadelphia, Berks, and Dauphin counties in Pennsylvania, Mercer and Camden counties of New Jersey, and New Castle county in Delaware. The common stock of the Corporation trades on the NASDAQ Stock Market (“NASDAQ”) under the symbol BMTC.
The Corporation operates in a highly competitive market area that includes local, national and regional banks as competitors along with savings banks, credit unions, insurance companies, trust companies, registered investment advisors and mutual fund families. The Corporation and its subsidiaries are regulated by many agencies including the Securities and Exchange Commission (“SEC”), NASDAQ, Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve and the Pennsylvania Department of Banking and Securities. The goal of the Corporation is to become the preeminent community bank and wealth management organization in the Philadelphia area.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Corporation and its subsidiaries conform with U.S. generally accepted accounting principles (“GAAP”). All inter-company transactions are eliminated in consolidation and certain reclassifications are made when necessary to conform the previous year’s financial statements to the current year’s presentation. In preparing the Consolidated Financial Statements, the Corporation is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. However, there are uncertainties inherent in making these estimates and actual results could differ from these estimates. The Corporation has identified certain areas that require estimates and assumptions, which include the allowance for loan and lease losses (the “Allowance”), the valuation of goodwill and intangible assets, the fair value of investment securities, the fair value of derivative financial instruments, and the valuation of mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation. The Corporation’s derivative financial instruments are not exchange-traded and therefore are valued utilizing models that use as their basis readily observable market parameters, specifically the London Interbank Offered Rate (“LIBOR”) swap curve, and are classified within Level 2 of the valuation hierarchy. In addition, certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
These critical accounting policies, along with other significant accounting policies, are presented in Footnote 1 – Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements in the Corporation’s 2017 Annual Report.
In addition to the critical accounting policies described and referenced above, as it relates to derivative financial instruments, the Corporation recognizes all derivative instruments at fair value as either assets or liabilities in other assets or other liabilities on the balance sheet. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship. As of March 31, 2018, the Corporation’s derivative financial instruments are not designated as hedges and gains or losses are recognized in current earnings.
Recent Acquisitions and Expansions
On December 15, 2017, the merger of Royal Bancshares of Pennsylvania, Inc. (“RBPI”) with and into the Corporation (the “RBPI Merger”), and the merger of Royal Bank America with and into the Bank, were completed. Consideration totaled $138.6 million, comprised of 3,098,754 shares of the Corporation’s common stock, the assumption of 140,224 warrants to purchase Corporation common stock, valued at $1.9 million, $112 thousand for the cash-out of certain options and $7 thousand cash in lieu of fractional shares. The RBPI Merger initially added $567.3 million of loans, $121.6 million of investments, $593.2 million of deposits, twelve new branches and a loan production office. The acquisition of RBPI expanded the Corporation’s footprint within Montgomery, Chester, Berks and Philadelphia Counties in Pennsylvania as well as Camden and Mercer Counties in New Jersey.
In addition to the RBPI Merger, the Bank has continued to execute on its strategies of diversification and acquiring and/or establishing specialty offices in strategically targeted areas where management believes there to be a high demand for the Bank’s products and services. On May 24, 2017, the Bank completed its acquisition of Hirshorn Boothby, a full-service insurance agency established in 1931 and headquartered in the Chestnut Hill section of Philadelphia. Hirshorn Boothby was immediately merged into the Bank’s existing insurance subsidiary, BMT Insurance Advisors, Inc., formerly known as Powers Craft Parker and Beard, Inc., expanding the footprint of this growing segment.
On May 12, 2017, the Corporation established a wealth management-focused office in Princeton, New Jersey which complements the already-established presence in central New Jersey that was acquired in the RBPI Merger.
Beginning in the second quarter of 2017, the Bank’s newly established Capital Markets department commenced operations focusing on providing risk management services to address the needs of its commercial customer base. These capital markets capabilities enable the Bank to offer hedging tools for qualified commercial customers through the use of interest rate swaps and options designed to mitigate the interest rate risk on variable rate loans. This interest rate hedging offering allows the Bank to participate and lead in larger and longer-dated credits without incurring additional interest rate risk. Additional services will focus on assisting qualified customers in hedging their foreign exchange risk and meeting their trade finance needs through enhanced international services capabilities.
On May 1, 2018, BMT Insurance Advisors, Inc. acquired Domenick & Associates, a full-service insurance agency established in 1993 and headquartered in the Old City section of Philadelphia. Domenick & Associates has a specialty niche with nonprofit and social service organizations which aligns well with our banking and wealth management solutions in these specialty service areas. This acquisition furthers our objective of pursuing strategic growth opportunities to enhance, broaden, and diversify our revenue streams.
Executive Overview
The following items highlight the Corporation’s results of operations for the three months ended March 31, 2018, as compared to the same period in 2017, and the changes in its financial condition as of March 31, 2018 as compared to December 31, 2017. More detailed information related to these highlights can be found in the sections that follow.
Three Month Results of Operations
● |
Net income attributable to Bryn Mawr Bank Corporation for the three months ended March 31, 2018 was $15.3 million, an increase of $6.3 million as compared to net income of $9.0 million for the same period in 2017. Diluted earnings per share was $0.75 for the three months ended March 31, 2018 as compared to $0.53 for the same period in 2017. |
● |
Return on average equity (“ROE”) and return on average assets (“ROA”) for the three months ended March 31, 2018 were 11.78% and 1.46%, respectively, as compared to ROE and ROA of 9.60% and 1.13% respectively, for the same period in 2017. |
● |
Tax-equivalent net interest income increased $9.9 million, or 36.0%, to $37.5 million for the three months ended March 31, 2018, as compared to $27.6 million for the same period in 2017. |
● |
Provision for loan and lease losses (the “Provision”) of $1.0 million for the three months ended March 31, 2018 was an increase of $739 thousand from the $291 thousand Provision recorded for the same period in 2017. |
● |
Noninterest income of $19.5 million for the three months ended March 31, 2018 increased $6.3 million as compared to $13.2 million for the same period in 2017. |
● |
Fees for wealth management services and insurance revenue of $10.3 million and $1.7 million, respectively, for the three months ended March 31, 2018 were increases of $1.0 million and $930 thousand, respectively, from the same period in 2017. |
● |
Noninterest expense of $36.0 million for the three months ended March 31, 2018 increased $9.3 million, from $26.7 million for the same period in 2017. |
Changes in Financial Condition
● |
Total assets of $4.30 billion as of March 31, 2018 decreased $149.3 million from $4.45 billion as of December 31, 2017. |
● |
Shareholders’ equity of $533.1 million as of March 31, 2018 increased $5.0 million from $528.1 million as of December 31, 2017. |
● |
Total portfolio loans and leases as of March 31, 2018 were $3.31 billion, an increase of $19.9 million from $3.29 billion as of December 31, 2017. |
● |
Total non-performing loans and leases of $7.5 million represented 0.23% of portfolio loans and leases as of March 31, 2018 as compared to $7.3 million, or 0.29% of portfolio loans and leases as of December 31, 2017. |
● |
The $17.7 million Allowance, as of March 31, 2018, represented 0.53% of portfolio loans and leases, as compared to $17.5 million, or 0.53% of portfolio loans and leases as of December 31, 2017. |
● |
Total deposits of $3.32 billion as of March 31, 2018 decreased $58.3 million from $3.37 billion as of December 31, 2017. |
● |
Wealth assets under management, administration, supervision and brokerage as of March 31, 2018 were $13.15 billion, an increase of $178.2 million from $12.97 billion December 31, 2017. |
Key Performance Ratios
Key financial performance ratios for the three months ended March 31, 2018 and 2017 are shown in the table below:
Three Months Ended March 31, |
||||||||
2018 |
2017 |
|||||||
Return on average equity |
11.78 |
% |
9.60 |
% |
||||
Return on average assets |
1.46 |
% |
1.13 |
% |
||||
Tax-equivalent net interest margin |
3.94 |
% |
3.74 |
% |
||||
Basic earnings per share |
$ | 0.76 | $ | 0.53 | ||||
Diluted earnings per share |
$ | 0.75 | $ | 0.53 | ||||
Dividend per share |
$ | 0.22 | $ | 0.21 | ||||
Dividend declared per share to net income per basic common share |
28.9 |
% |
39.4 |
% |
The following table presents certain key period-end balances and ratios as of March 31, 2018 and December 31, 2017:
(dollars in millions, except per share amounts) |
March 31, 2018 |
December 31, 2017 |
||||||
Book value per share |
$ | 26.35 | $ | 26.19 | ||||
Tangible book value per share |
$ | 16.10 | $ | 15.98 | ||||
Allowance as a percentage of portfolio loans and leases |
0.53 |
% |
0.53 |
% |
||||
Tier I capital to risk weighted assets |
10.46 |
% |
10.36 |
% |
||||
Tangible common equity ratio |
9.19 |
% |
8.67 |
% |
||||
Loan to deposit ratio |
99.7 |
% |
97.4 |
% |
||||
Wealth assets under management, administration, supervision and brokerage |
$ | 13,146.9 | $ | 12,968.7 | ||||
Portfolio loans and leases |
$ | 3,305.8 | $ | 3,285.9 | ||||
Total assets |
$ | 4,300.4 | $ | 4,449.7 | ||||
Shareholders’ equity |
$ | 533.1 | $ | 528.1 |
The following sections discuss, in detail, the Corporation’s results of operations for the three months ended March 31, 2018, as compared to the same periods in 2017, and the changes in its financial condition as of March 31, 2018 as compared to December 31, 2017.
Components of Net Income
Net income is comprised of five major elements:
● |
Net Interest Income, or the difference between the interest income earned on loans, leases and investments and the interest expense paid on deposits and borrowed funds; |
● |
Provision for Loan and Lease Losses, or the amount added to the Allowance to provide for estimated inherent losses on portfolio loans and leases; |
● |
Non-Interest Income, which is made up primarily of wealth management revenue, capital markets revenue, gains and losses from the sale of residential mortgage loans, gains and losses from the sale of available for sale investment securities and other fees from loan and deposit services; |
● |
Non-Interest Expense, which consists primarily of salaries and employee benefits, occupancy, intangible asset amortization, professional fees, due diligence, merger-related and merger integration expenses, and other operating expenses; and |
● |
Income Tax Expense, which include state and federal jurisdictions. |
TAX-EQUIVALENT NET INTEREST INCOME
Net interest income is the primary source of the Corporation’s revenue. The below tables present a summary, for the three months ended March 31, 2018 and 2017, of the Corporation’s average balances and tax-equivalent yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities. The tax-equivalent net interest margin is the tax-equivalent net interest income as a percentage of average interest-earning assets. The tax-equivalent net interest spread is the difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The effect of noninterest-bearing liabilities represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity.
Tax-equivalent net interest income increased $9.9 million, or 36.0%, to $37.5 million for the three months ended March 31, 2018, as compared to $27.6 million for the same period in 2017. The increase in tax-equivalent net interest income between the periods was largely related to the increase in tax-equivalent interest and fees on loans and leases, which increased $12.1 million for the three months ended March 31, 2018 as compared to the same period in 2017. The increase in tax-equivalent interest and fees on loans and leases was primarily related to the $735.5 million increase in average loans to $3.29 billion as of March 31, 2018 from $2.56 billion as of March 31, 2017. The increase in average loans was largely related to the loans and leases acquired in the RBPI Merger which initially increased loans and leases by $567.3 million, as well as organic loan growth. In addition to the increase in tax-equivalent interest income on loans and leases, interest on available for sale investment securities increased by $958 thousand for the three months ended March 31, 2018 as compared to the same period in 2017. Average available for sale investment securities increased by $133.5 million for the first quarter of 2018 as compared to the first quarter of 2017.
Partially offsetting the effect on tax-equivalent interest income associated with the increase in average loans and leases and available for sale investment securities were increases of $1.6 million, $603 thousand, $288 thousand and $773 thousand of interest expense on interest-bearing deposits, short-term borrowings, junior subordinated debtentures and subordinated notes, respectively. The increases in interest expense were primarily related to increases in the average balances of interest-bearing deposits and junior subordinated debentures as a result of the RBPI Merger, and the December 13, 2017 issuance of $70 million, ten-year, 4.25% fixed-to-floating subordinated notes.
Analyses of Interest Rates and Interest Differential
The tables below present the major asset and liability categories on an average daily balance basis for the periods presented, along with interest income, interest expense and key rates and yields.
For the Three Months Ended March 31, |
||||||||||||||||||||||||
2018 |
2017 |
|||||||||||||||||||||||
(dollars in thousands) |
Average |
Interest |
Average |
Average |
Interest |
Average |
||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Interest-bearing deposits with banks |
$ | 38,044 | $ | 53 | 0.56 |
% |
$ | 39,669 | $ | 66 | 0.67 |
% |
||||||||||||
Investment securities - available for sale: |
||||||||||||||||||||||||
Taxable |
498,718 | 2,675 | 2.18 |
% |
354,229 | 1,653 | 1.89 |
% |
||||||||||||||||
Tax-exempt(4) |
25,501 | 100 | 1.98 |
% |
31,485 | 164 | 2.11 |
% |
||||||||||||||||
Total investment securities – available for sale |
519,219 | 2,775 | 2.17 |
% |
385,714 | 1,817 | 1.91 |
% |
||||||||||||||||
Investment securities – held to maturity |
7,913 | 12 | 0.62 |
% |
3,708 | 7 | 0.77 |
% |
||||||||||||||||
Investment securities – trading |
8,339 | 21 | 1.02 |
% |
3,890 | 8 | 0.83 |
% |
||||||||||||||||
Loans and leases(1)(2)(3)(4) |
3,291,212 | 40,754 | 5.02 |
% |
2,555,677 | 28,622 | 4.54 |
% |
||||||||||||||||
Total interest-earning assets |
3,864,727 | 43,615 | 4.58 |
% |
2,988,652 | 30,520 | 4.14 |
% |
||||||||||||||||
Cash and due from banks |
10,698 | 14,942 | ||||||||||||||||||||||
Allowance for loan and lease losses |
(17,628 |
) |
(17,580 |
) |
||||||||||||||||||||
Other assets |
388,383 | 258,046 | ||||||||||||||||||||||
Total assets |
$ | 4,246,180 | $ | 3,244,060 | ||||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||
Savings, NOW, and market rate accounts |
$ | 1,676,733 | $ | 1,479 | 0.36 |
% |
$ | 1,388,561 | $ | 756 | 0.22 |
% |
||||||||||||
Wholesale deposits |
231,289 | 733 | 1.29 |
% |
143,461 | 317 | 0.90 |
% |
||||||||||||||||
Retail time deposits |
527,469 | 1,260 | 0.97 |
% |
320,172 | 755 | 0.96 |
% |
||||||||||||||||
Total interest-bearing deposits |
2,435,491 | 3,472 | 0.58 |
% |
1,852,194 | 1,828 | 0.40 |
% |
||||||||||||||||
Short-term borrowings |
172,534 | 630 | 1.48 |
% |
47,603 | 27 | 0.23 |
% |
||||||||||||||||
Long-term FHLB advances |
123,920 | 562 | 1.84 |
% |
182,507 | 698 | 1.55 |
% |
||||||||||||||||
Subordinated notes |
98,430 | 1,143 | 4.71 |
% |
29,537 | 370 | 5.08 |
% |
||||||||||||||||
Junior subordinated debt |
21,430 | 288 | 5.45 |
% |
— | — | — | |||||||||||||||||
Total interest-bearing liabilities |
2,851,805 | 6,095 | 0.87 |
% |
2,111,841 | 2,923 | 0.56 |
% |
||||||||||||||||
Non-interest-bearing deposits |
835,476 | 711,794 | ||||||||||||||||||||||
Other liabilities |
32,465 | 38,211 | ||||||||||||||||||||||
Total non-interest-bearing liabilities |
867,941 | 750,005 | ||||||||||||||||||||||
Total liabilities |
3,719,746 | 2,861,846 | ||||||||||||||||||||||
Shareholders’ equity |
526,434 | 382,214 | ||||||||||||||||||||||
Total liabilities and shareholders’ equity |
$ | 4,246,180 | $ | 3,244,060 | ||||||||||||||||||||
Net interest spread |
3.71 |
% |
3.58 |
% |
||||||||||||||||||||
Effect of non-interest-bearing sources |
0.23 |
% |
0.16 |
% |
||||||||||||||||||||
Net interest income/margin on earning assets(4) |
$ | 37,520 | 3.94 |
% |
$ | 27,597 | 3.74 |
% |
||||||||||||||||
Tax-equivalent adjustment(4) |
$ | 81 | 0.01 |
% |
$ | 194 | 0.02 |
% |
(1) |
Non-accrual loans have been included in average loan balances, but interest on non-accrual loans has not been included for purposes of determining interest income. |
(2) |
Includes portfolio loans and leases and loans held for sale. |
(3) |
Interest on loans and leases includes deferred fees of $278 and $238 for the three months ended March 31, 2018 and 2017, respectively. |
(4) |
Tax rate used for tax-equivalent calculations is 21% for 2018 and 35% for 2017 |
Rate/Volume Analysis (tax-equivalent basis)*
The rate/volume analysis in the table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the three months ended March 31, 2018 as compared to the same period in 2017, allocated by rate and volume. The change in interest income and/or expense due to both volume and rate has been allocated to changes in volume.
Three Months Ended March 31, |
||||||||||||
(dollars in thousands) |
2018 Compared to 2017 |
|||||||||||
increase/(decrease) |
Volume |
Rate |
Total |
|||||||||
Interest Income: |
||||||||||||
Interest-bearing deposits with banks |
$ | (3 |
) |
$ | (10 |
) |
$ | (13 |
) |
|||
Investment securities - taxable |
698 | 342 | 1,040 | |||||||||
Investment securities -nontaxable |
(57 |
) |
(7 |
) |
(64 |
) |
||||||
Loans and leases |
8,236 | 3,896 | 12,132 | |||||||||
Total interest income |
8,874 | 4,221 | 13,095 | |||||||||
Interest expense: |
||||||||||||
Savings, NOW and market rate accounts |
154 | 569 | 723 | |||||||||
Wholesale deposits |
194 | 222 | 416 | |||||||||
Retail time deposits |
492 | 13 | 505 | |||||||||
Borrowed funds – short-term |
71 | 532 | 603 | |||||||||
Borrowed funds – long-term |
(612 |
) |
476 | (136 |
) |
|||||||
Subordinated notes |
1,360 | (587 |
) |
773 | ||||||||
Junior subordinated debentures |
288 | — | 288 | |||||||||
Total interest expense |
1,947 | 1,225 | 3,172 | |||||||||
Interest differential |
$ | 6,927 | $ | 2,996 | $ | 9,923 |
* The tax rate used in the calculation of the tax-equivalent income is 21% for 2018 and 35% for 2017
Tax-Equivalent Net Interest Margin
The tax-equivalent net interest margin of 3.94% for the three months ended March 31, 2018 was a 20 basis point increase from 3.74% for the same period in 2017. Adjusting for the impact of the accretion of purchase accounting fair value marks, the adjusted tax-equivalent net interest margin remained relatively unchanged at 3.62% and 3.63% for three months ended March 31, 2018 and 2017, respectively. The contribution to the tax-equivalent net interest margin from the accretion of purchase accounting adjustments was 32 basis points in 2018 as compared to 11 basis points in 2017.
The tax-equivalent net interest margin and related components for the past five consecutive quarters are shown in the table below:
Quarter |
Interest- Earning Asset Yield |
Interest- Bearing Liability Cost |
Net Interest Spread |
Effect of Non-Interest Bearing Sources |
Net Interest Margin |
||||||||||||||||||||
1st Quarter 2018 |
4.58 | % |
|
0.87 | % |
|
3.71 | % |
|
0.23 | % |
|
3.94 | % |
|
||||||||||
4th Quarter 2017 |
4.15 | % |
|
0.74 | % |
|
3.41 | % |
|
0.21 | % |
|
3.62 | % |
|
||||||||||
3rd Quarter 2017 |
4.18 | % |
|
0.67 | % |
|
3.51 | % |
|
0.20 | % |
|
3.71 | % |
|
||||||||||
2nd Quarter 2017 |
4.11 | % |
|
0.61 | % |
|
3.50 | % |
|
0.18 | % |
|
3.68 | % |
|
||||||||||
1st Quarter 2017 |
4.14 | % |
|
0.56 | % |
|
3.58 | % |
|
0.16 | % |
|
3.74 | % |
|
Interest Rate Sensitivity
Management actively manages the Corporation’s interest rate sensitivity position. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve sustainable growth in net interest income. The Corporation’s Asset Liability Committee (“ALCO”), using policies and procedures approved by the Corporation’s Board of Directors, is responsible for the management of the Corporation’s interest rate sensitivity position. The Corporation manages interest rate sensitivity by changing the mix, pricing and re-pricing characteristics of its assets and liabilities. This is accomplished through the management of the investment portfolio, the pricings of loans and deposit offerings and through wholesale funding. Wholesale funding is available from multiple sources including borrowings from the FHLB, the Federal Reserve Bank of Philadelphia’s discount window, federal funds from correspondent banks, certificates of deposit from institutional brokers, Certificate of Deposit Account Registry Service (“CDARS”), Insured Network Deposit (“IND”) Program, Charity Deposits Corporation (“CDC”) (formerly known as Institutional Deposit Corporation (“IDC”)), Insured Cash Sweep (“ICS”) and Pennsylvania Local Government Investment Trust (“PLGIT”).
Management utilizes several tools to measure the effect of interest rate risk on net interest income. These methods include gap analysis, market value of portfolio equity analysis, and net interest income simulations under various scenarios. The results of these analyses are compared to limits established by the Corporation’s ALCO policies and make adjustments as appropriate if the results are outside the established limits.
The following table demonstrates the annualized result of an interest rate simulation and the estimated effect that a parallel interest rate shift, or “shock”, in the yield curve and subjective adjustments in deposit pricing, might have on management’s projected net interest income over the next 12 months.
This simulation assumes that there is no growth in interest-earning assets or interest-bearing liabilities over the next twelve months. By definition, the simulation assumes static interest rates and does not incorporate forecasted changes in the yield curve. The changes to net interest income shown below are in compliance with the Corporation’s policy guidelines.
Summary of Interest Rate Simulation
Change in Net Interest Income Over the Twelve Months Beginning After March 31, 2018 |
Change in Net Interest Income Over the Twelve Months Beginning After December 31, 2017 |
|||||||||||||||
Amount |
Percentage |
Amount |
Percentage |
|||||||||||||
+300 basis points |
$ | 7,448 | 4.86 |
% |
$ | 15,953 | 10.66 |
% |
||||||||
+200 basis points |
$ | 5,001 | 3.26 |
% |
$ | 10,644 | 7.11 |
% |
||||||||
+100 basis points |
$ | 2,523 | 1.65 |
% |
$ | 5,316 | 3.55 |
% |
||||||||
-100 basis points |
$ | (4,722 |
) |
(3.08 |
) % |
$ | (6,913 |
) |
(4.62 |
) |
The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of March 31, 2018 in the +100 basis point scenario, demonstrating that a 100 basis point increase in interest rates would have a positive impact on net interest income over the next 12 months. The balance sheet is less asset sensitive in a rising-rate environment as of March 31, 2018 than it was as of December 31, 2017. This decrease in sensitivity is related to an increase in non-maturity market priced deposit balances, a decrease in cash balances and an increase in short term borrowings. The magnitude of the change in net interest income resulting from a 100 basis point decrease in rates as compared to the magnitude of the increase in net income accompanying a 100 basis point increase in rates is the result of asset yields repricing more quickly in response to market changes compared to deposit rates in a down 100 basis point rate shift.
The interest rate simulation is an estimate based on assumptions, which are derived from past behavior of customers, along with expectations of future behavior relative to interest rate changes. In today’s economic environment and the current extended period of very low interest rates, the reliability of management’s assumptions in the interest rate simulation model is more uncertain than in prior periods. Actual customer behavior, as it relates to deposit activity, may be significantly different than expected behavior, which could cause an unexpected outcome and may result in lower net interest income than that derived from the analysis referenced above.
Gap Analysis
The interest sensitivity, or gap analysis, identifies interest rate risk by showing repricing gaps in the Corporation’s balance sheet. All assets and liabilities are reflected based on behavioral sensitivity, which is usually the earliest of: repricing, maturity, contractual amortization, prepayments or likely call dates. Non-maturity deposits, such as NOW, savings and money market accounts are spread over various time periods based on the expected sensitivity of these rates considering liquidity and the investment preferences of management. Non-rate-sensitive assets and liabilities are spread over time periods to reflect management’s view of the maturity of these funds.
Non-maturity deposits (demand deposits in particular) are recognized by the Bank’s regulatory agencies to have different sensitivities to interest rate environments. Consequently, it is an accepted practice to spread non-maturity deposits over defined time periods to capture that sensitivity. Commercial demand deposits are often in the form of compensating balances, and fluctuate inversely to the level of interest rates; the maturity of these deposits is reported as having a shorter life than typical retail demand deposits. Additionally, the Bank’s regulatory agencies have suggested distribution limits for non-maturity deposits. However, management has taken a more conservative approach than these limits would suggest by forecasting these deposit types with a shorter maturity. The following table presents the Corporation’s gap analysis as of March 31, 2018:
(dollars in millions) |
0 to 90 Days |
91 to 365 Days |
1 - 5 Years |
Over 5 Years |
Non-Rate Sensitive |
Total |
||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Interest-bearing deposits with banks |
$ | 24.6 | $ | — | $ | — | $ | — | $ | — | $ | 24.6 | ||||||||||||
Investment securities(1) |
28.1 | 58.5 | 321.7 | 141.9 | — | 550.2 | ||||||||||||||||||
Loans and leases(2) |
1,281.7 | 397.2 | 1,220.9 | 411.5 | — | 3,311.3 | ||||||||||||||||||
Allowance |
— | — | — | — | (17.7 | ) | (17.7 | ) | ||||||||||||||||
Cash and due from banks |
— | — | — | — | 7.8 | 7.8 | ||||||||||||||||||
Other assets |
— | — | — | — | 424.1 | 424.1 | ||||||||||||||||||
Total assets |
$ | 1,334.4 | $ | 455.7 | $ | 1,542.6 | $ | 553.4 | $ | 414.2 | $ | 4,300.3 | ||||||||||||
Liabilities and shareholders’ equity: |
||||||||||||||||||||||||
Demand, non-interest-bearing |
$ | 53.5 | $ | 160.4 | $ | 225.7 | $ | 423.5 | $ | — | $ | 863.1 | ||||||||||||
Savings, NOW and market rate |
114.8 | 344.5 | 818.7 | 416.4 | — | 1,694.4 | ||||||||||||||||||
Time deposits |
102.6 | 309.1 | 110.6 | 3.1 | — | 525.4 | ||||||||||||||||||
Wholesale non-maturity deposits |
63.4 | — | — | — | — | 63.4 | ||||||||||||||||||
Wholesale time deposits |
138.3 | 30.8 | — | — | — | 169.1 | ||||||||||||||||||
Short-term borrowings |
173.7 | — | — | — | — | 173.7 | ||||||||||||||||||
Long-term FHLB advances |
20.0 |
32.5 | 55.3 | — | — | 107.8 | ||||||||||||||||||
Subordinated notes |
— | — | 98.4 | — | — | 98.4 | ||||||||||||||||||
Junior subordinated debentures |
21.5 | — | — | — | — | 21.5 | ||||||||||||||||||
Other liabilities |
— | — | — | — | 50.4 | 50.4 | ||||||||||||||||||
Shareholders’ equity |
19.0 |
57.1 | 304.6 | 152.4 | — | 533.1 | ||||||||||||||||||
Total liabilities and shareholders’ equity |
$ | 706.8 | $ | 934.4 | $ | 1,613.3 | $ | 995.4 | $ | 50.4 | $ | 4,300.3 | ||||||||||||
Interest-earning assets |
$ | 1,334.4 | $ | 455.7 | $ | 1,542.6 | $ | 553.4 | $ | — | $ | 3,886.1 | ||||||||||||
Interest-bearing liabilities |
634.3 | 716.9 | 1,083.0 | 419.5 | — | 2,853.7 | ||||||||||||||||||
Difference between interest-earning assets and interest-bearing liabilities |
$ | 700.1 | $ | (261.2 | ) | $ | 459.6 | $ | 133.9 | $ | — | $ | 1,032.4 | |||||||||||
Cumulative difference between interest earning assets and interest-bearing liabilities |
$ | 700.1 | $ | 438.9 | $ | 898.5 | $ | 1,032.4 | $ | — | $ | 1,032.4 | ||||||||||||
Cumulative earning assets as a % of cumulative interest-bearing liabilities |
210 |
% |
132 |
% |
137 |
% |
136 |
% |
(1) Investment securities include available for sale, held to maturity and trading.
(2) Loans include portfolio loans and leases and loans held for sale.
The table above indicates that the Corporation is asset-sensitive in the immediate 90-day time frame and may experience an increase in net interest income during that time period if rates rise. Conversely, if rates decline, net interest income may decline. It should be noted that the gap analysis is only one tool used to measure interest rate sensitivity and should be used in conjunction with other measures such as the interest rate simulation discussed above. The gap analysis measures the timing of changes in rate, but not the true weighting of any specific component of the Corporation’s balance sheet. The asset-sensitive position reflected in this gap analysis is similar to the Corporation’s position at December 31, 2017.
PROVISION FOR LOAN AND LEASE LOSSES
For the three months ended March 31, 2018, the Corporation recorded a Provision of $1.0 million which was a $739 thousand increase from the same period in 2017. Net charge-offs for the first quarter of 2018 were $893 thousand as compared to $670 thousand for the same period in 2017. The loan and lease portfolio experienced improvements in certain historic charge-off rates during the lookback period and in certain credit quality and economic indicators used in the Allowance calculation. The increase in the Provision between the periods reflects the increase in net charge-offs, partially offset by the improvement of certain historic charge-off rates and credit quality indicators.
Asset Quality and Analysis of Credit Risk
As of March 31, 2018, total nonperforming loans and leases decreased by $1.0 million to $7.5 million, representing 0.23% of portfolio loans and leases, as compared to $8.6 million, or 0.26% of portfolio loans and leases as of December 31, 2017. The decrease in nonperforming loans and leases was comprised of pay-offs and pay-downs of $2.2 million, charge-offs of $317 thousand, and upgrades to performing status of $942 thousand of loans and leases classified as nonperforming as of December 31, 2017. These decreases were partially offset by the addition of $2.9 million of new nonperforming loans and leases as of March 31, 2018.
As of March 31, 2018, the Allowance of $17.7 million represented 0.53% of portfolio loans and leases, relatively unchanged from December 31, 2017. The Allowance on originated portfolio loans, as a percentage of originated portfolio loans, was 0.69% as of March 31, 2018 as compared to 0.70% as of December 31, 2017. Loans acquired in mergers are recorded at fair value as of the date of acquisition. This fair value estimate takes into account an estimate of the expected lifetime losses of the acquired loans. As such, an acquired loan will not generally become subject to additional Allowance unless it becomes impaired.
As of March 31, 2018, the Corporation had $6.4 million of troubled debt restructurings (“TDRs”), of which $5.2 million were in compliance with the modified terms and excluded from non-performing loans and leases. As of December 31, 2017, the Corporation had $9.1 million of TDRs, of which $5.8 million were in compliance with the modified terms, and were excluded from non-performing loans and leases.
As of March 31, 2018, the Corporation had a recorded investment of $12.2 million of impaired loans and leases which included $6.4 million of TDRs. Impaired loans and leases are those for which it is probable that the Corporation will not be able to collect all scheduled principal and interest in accordance with the original terms of the loans and leases. Impaired loans and leases as of December 31, 2017 totaled $13.9 million, which included $9.1 million of TDRs. Refer to Note 5H in the Notes to Unaudited Consolidated Financial Statements for more information regarding the Corporation’s impaired loans and leases.
The Corporation continues to be diligent in its credit underwriting process and proactive with its loan review process, including the engagement of the services of an independent outside loan review firm, which helps identify developing credit issues. Proactive steps that are taken include the procurement of additional collateral (preferably outside the current loan structure) whenever possible and frequent contact with the borrower. The Corporation believes that timely identification of credit issues and appropriate actions early in the process serve to mitigate overall risk of loss.
Nonperforming Assets and Related Ratios
(dollars in thousands) |
March 31, 2018 |
December 31, 2017 |
||||||
Nonperforming Assets: |
||||||||
Nonperforming loans and leases |
$ | 7,533 | $ | 8,579 | ||||
Other real estate owned |
300 | 304 | ||||||
Total nonperforming assets |
$ | 7,833 | $ | 8,883 | ||||
Troubled Debt Restructurings: |
||||||||
TDRs included in non-performing loans |
$ | 1,125 | $ | 3,289 | ||||
TDRs in compliance with modified terms |
5,235 | 5,800 | ||||||
Total TDRs |
$ | 6,360 | $ | 9,089 | ||||
Loan and Lease quality indicators: |
||||||||
Allowance for loan and lease losses to nonperforming loans and leases |
234.5 |
% |
204.3 |
% |
||||
Nonperforming loans and leases to total portfolio loans and leases |
0.23 |
% |
0.26 |
% |
||||
Allowance for loan and lease losses to total portfolio loans and leases |
0.53 |
% |
0.53 |
% |
||||
Nonperforming assets to total loans and leases and OREO |
0.24 |
% |
0.27 |
% |
||||
Nonperforming assets to total assets |
0.18 |
% |
0.21 |
% |
||||
Total portfolio loans and leases |
$ | 3,305,795 | $ | 3,285,858 | ||||
Allowance for loan and lease losses |
$ | 17,662 | $ | 17,525 |
NONINTEREST INCOME
Three Months Ended March 31, 2018 Compared to the Same Period in 2017
Non-interest income of $19.5 million for the three months ended March 31, 2018 increased $6.3 million as compared to $13.2 million for the same period in 2017. Increases of $1.0 million, $930 thousand, $666 thousand, and $3.2 million in fees for wealth management services, insurance commissions, capital markets revenues and other operating income, respectively, were recorded. The increase in fees for wealth management services was related to the $1.42 billion increase in wealth assets under management, administration, supervision and brokerage between March 31, 2017 and March 31, 2018. The increase in insurance commissions was primarily related to the May 2017 acquisition of Hirshorn Boothby which expanded our insurance division into the city of Philadelphia. The increase in capital markets revenues was related to the formation of our Capital Markets group, which began operations in the second quarter of 2017. The $3.2 million increase in other operating income was primarily related to a $2.3 million recovery of a purchase accounting fair value mark resulting from the pay off, in full, of a purchased credit impaired loan acquired in the RBPI Merger.
The following table provides supplemental information regarding mortgage loan originations and sales:
For the Three Months Ended or as of March 31, |
||||||||
(dollars in thousands) |
2018 |
2017 |
||||||
Mortgage originations |
$ | 26,055 | $ | 48,550 | ||||
Mortgage loans sold: |
||||||||
Servicing retained |
$ | 1,850 | $ | 27,705 | ||||
Servicing released |
15,956 | 4,966 | ||||||
Total mortgage loans sold |
$ | 17,806 | $ | 32,671 | ||||
Percentage of originated mortgage loans sold |
68.3 |
% |
67.3 |
% |
||||
Servicing retained % |
10.4 |
% |
84.8 |
% |
||||
Servicing released % |
89.6 |
% |
15.2 |
% |
||||
Residential mortgage loans serviced for others |
$ | 634,970 | $ | 638,553 | ||||
Mortgage servicing rights |
$ | 5,706 | $ | 5,686 | ||||
Gain on sale of mortgage loans |
$ | 345 | $ | 578 | ||||
Loan servicing and other fees |
$ | 686 | $ | 503 | ||||
Amortization of MSRs |
$ | 221 | $ | 169 | ||||
(Recovery) / Impairment of MSRs |
$ | (50 |
) |
$ | 3 |
The following table provides details of other operating income for the three months ended March 31, 2018 and 2017:
|
Three Months Ended March 31, |
|||||||
(dollars in thousands) |
2018 |
2017 |
||||||
Merchant interchange fees |
$ | 387 | $ | 341 | ||||
Bank-owned life insurance (“BOLI”) income |
278 | 201 | ||||||
Commissions and fees |
255 | 131 | ||||||
Safe deposit box rentals |
91 | 90 | ||||||
Other investment income |
22 | — | ||||||
Rent income |
43 | 48 | ||||||
Gain on trading investments |
335 | 210 | ||||||
Recovery of purchase accounting fair value loan mark |
2,294 | 18 | ||||||
Miscellaneous other income |
633 | 128 | ||||||
Other operating income |
$ | 4,338 | $ | 1,167 |
Wealth Assets Under Management, Administration, Supervision and Brokerage (“Wealth Assets”)
Wealth Asset accounts are categorized into two groups; the first account group consists predominantly of clients whose fees are determined based on the market value of the assets held in their accounts (“Market Value” fee basis). The second account group consists predominantly of clients whose fees are set at fixed amounts (“Fixed Fee” basis), and, as such, are not affected by market value changes.
The following tables detail the composition of Wealth Assets as it relates to the calculation of fees for wealth management services:
(dollars in thousands) |
Wealth Assets as of: |
|||||||||||||||||||
Fee Basis |
March 31, 2018 |
December 31, 2017 |
September 30, 2017 |
June 30, 2017 |
March 31, 2017 |
|||||||||||||||
Market value |
$ | 5,693,146 | $ | 5,884,692 | $ | 5,759,375 | $ | 5,593,936 | $ | 5,483,237 | ||||||||||
Fixed fee |
7,453,780 | 7,084,046 | 6,671,995 | 6,456,619 | 6,242,223 | |||||||||||||||
Total |
$ | 13,146,926 | $ | 12,968,738 | $ | 12,431,370 | $ | 12,050,555 | $ | 11,725,460 |
Percentage of Wealth Assets as of: |
||||||||||||||||||||
Fee Basis |
March 31, 2018 |
December 31, 2017 |
September 30, 2017 |
June 30, 2017 |
March 31, 2017 |
|||||||||||||||
Market value |
43.3 | % | 45.4 | % | 46.3 | % | 46.4 | % | 46.8 | % | ||||||||||
Fixed fee |
56.7 | % | 54.6 | % | 53.7 | % | 53.6 | % | 53.2 | % | ||||||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
The following tables detail the composition of fees for wealth management services for the periods indicated:
(dollars in thousands) |
For the Three Months Ended: |
|||||||||||||||||||
Fee Basis |
March 31, 2018 |
December 31, 2017 |
September 30, 2017 |
June 30, 2017 |
March 31, 2017 |
|||||||||||||||
Market value |
$ | 7,880 | $ | 7,618 | $ | 7,522 | $ | 7,382 | $ | 7,230 | ||||||||||
Fixed fee |
2,428 | 2,356 | 2,129 | 2,425 | 2,073 | |||||||||||||||
Total |
$ | 10,308 | $ | 9,974 | $ | 9,651 | $ | 9,807 | $ | 9,303 |
Percentage of Fees for Wealth Management for the Three Months Ended: |
||||||||||||||||||||
Fee Basis |
March 31, 2018 |
December 31, 2017 |
September 30, 2017 |
June 30, 2017 |
March 31, 2017 |
|||||||||||||||
Market value |
76.4 | % | 76.4 | % | 77.9 | % | 75.3 | % | 77.7 | % | ||||||||||
Fixed fee |
23.6 | % | 23.6 | % | 22.1 | % | 24.7 | % | 22.3 | % | ||||||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Customer Derivatives
To accommodate the risk management needs of qualified commercial customers, the Bank enters into financial derivative transactions consisting of interest rate swaps, options, risk participation agreements and foreign exchange contracts. Derivative financial instruments involve, to varying degrees, interest rate, market and credit risk. Market risk exposure from customer derivative positions is managed by simultaneously entering into matching transactions with institutional dealer counterparties that offset customer contracts in notional amount and term. Derivative contracts create counterparty credit risk with both the Bank’s customers and with institutional dealer counterparties. The Corporation manages customer counterparty credit risk through its credit policy, approval processes, monitoring procedures and by obtaining adequate collateral, when appropriate. The Bank seeks to minimize dealer counterparty credit risk by establishing credit limits and collateral agreements through industry standard agreements published by the International Swaps and Derivatives Association (ISDA) and associated credit support annex (CSA) agreements. None of the Bank’s outstanding derivative contracts associated with the customer derivative program is designated as a hedge and none is entered into for speculative purposes. Derivative instruments are recorded at fair value, with changes in fair values recognized in earnings as components of noninterest income and noninterest expense on the consolidated statements of income.
NONINTEREST EXPENSE
Three Months Ended March 31, 2018 Compared to the Same Period in 2017
Noninterest expense for the three months ended March 31, 2018 increased $9.4 million, to $36.0 million, from the same period in 2017. A majority of the increase was related to the additional expenses associated with the staff and facilities assumed in the RBPI Merger. In addition, the May 2017 acquisition of Hirshorn Boothby and the formation of our Capital Markets group in the second quarter of 2017 contributed to the increase in noninterest expense. Due diligence, merger-related and merger integration expenses increased $3.8 million between the quarters, primarily related to the RBPI Merger.
The following table provides details of other operating expenses for the three months ended March 31, 2018 and 2017:
|
Three Months Ended March 31, |
|||||||
(dollars in thousands) |
2018 |
2017 |
||||||
Contributions |
$ | 188 | $ | 121 | ||||
Deferred compensation trust expense |
81 | 125 | ||||||
Director fees |
161 | 157 | ||||||
Dues and subscriptions |
257 | 154 | ||||||
FDIC insurance |
200 | 374 | ||||||
Insurance |
227 | 207 | ||||||
Loan processing |
270 | 523 | ||||||
Miscellaneous other expenses |
563 | 105 | ||||||
MSR amortization and impairment / (recovery) |
171 | 172 | ||||||
Other taxes |
13 | 9 | ||||||
Outsourced services |
66 | 99 | ||||||
Portfolio maintenance |
123 | 99 | ||||||
Postage |
163 | 148 | ||||||
Stationary and supplies |
152 | 117 | ||||||
Telephone and data lines |
405 | 400 | ||||||
Temporary help and recruiting |
99 | 397 | ||||||
Travel and entertainment |
178 | 175 | ||||||
Other operating expenses |
$ | 3,317 | $ | 3,382 |
INCOME TAXES
Although income before income taxes increased $6.2 million for the three months ended March 31, 2018 as compared for the same period in 2017, income tax expense remained relatively unchanged at $4.6 million for the three months ended March 31, 2018 and 2017 primarily due to the reduction in the federal corporate income tax rate as a result of the Tax Cuts and Jobs Act (“Tax Reform”). Included in the income tax expense for the first quarter of 2018 was a $590 thousand discrete tax charge related to the re-measurement of deferred tax assets and a $361 thousand excess tax benefit related to the vesting of stock based awards and exercise of stock options. The excess tax benefit for the first quarter of 2017 was $145 thousand. The tax expense for the first quarter of 2018 reflects a decrease in the effective tax rate to 23.25% for the first quarter of 2018 from 33.88% for the first quarter of 2017.
In connection with the December 15, 2017 RBPI Merger, measurement period adjustments to the fair value of assets acquired gave rise to $1.2 million in additional deferred tax assets. These deferred tax assets were determined using the enacted tax rate in effect at the date of acquisition and subsequently re-measured at the new, lower corporate income tax rate due to Tax Reform.
BALANCE SHEET ANALYSIS
Total assets of $4.30 billion as of March 31, 2018 decreased $149.3 million from $4.45 billion as of December 31, 2017. The following sections detail the changes:
Loans and Leases
The table below compares the portfolio loans and leases outstanding at March 31, 2018 to December 31, 2017:
March 31, 2018 |
December 31, 2017 |
Change |
||||||||||||||||||||||
(dollars in thousands) |
Balance |
Percent of Portfolio |
Balance |
Percent of Portfolio |
Amount |
Percent |
||||||||||||||||||
Commercial mortgage |
$ | 1,541,457 | 46.6 |
% |
$ | 1,523,377 | 46.4 |
% |
$ | 18,080 | 1.2 |
% |
||||||||||||
Home equity lines & loans |
211,469 | 6.4 |
% |
218,275 | 6.6 |
% |
(6,806 |
) |
(3.1 |
) % |
||||||||||||||
Residential mortgage |
453,655 | 13.7 |
% |
458,886 | 14.0 |
% |
(5,231 |
) |
(1.1 |
) % |
||||||||||||||
Construction |
202,168 | 6.1 |
% |
212,454 | 6.5 |
% |
(10,286 |
) |
(4.8 |
) % |
||||||||||||||
Commercial and industrial |
727,231 | 22.0 |
% |
719,312 | 21.9 |
% |
7,919 | 1.1 |
% |
|||||||||||||||
Consumer |
48,423 | 1.5 |
% |
38,153 | 1.2 |
% |
10,270 | 26.9 |
% |
|||||||||||||||
Leases |
121,392 | 3.7 |
% |
115,401 | 3.5 |
% |
5,991 | 5.2 |
% |
|||||||||||||||
Total portfolio loans and leases |
3,305,795 | 100.0 |
% |
3,285,858 | 100.0 |
% |
19,937 | 0.6 |
% |
|||||||||||||||
Loans held for sale |
5,522 | 3,794 | 1,728 | 45.5 |
% |
|||||||||||||||||||
Total loans and leases |
$ | 3,311,317 | $ | 3,289,652 | $ | 21,665 | 0.7 |
% |
Cash and Investment Securities
As of March 31, 2018, liquidity remained strong as the Corporation had $23.4 million of cash balances at the Federal Reserve and $1.2 million in other interest-bearing accounts, along with significant borrowing capacity as discussed in the “Liquidity” section below.
Investment securities available for sale as of March 31, 2018 totaled $534.1 million, as compared to $689.2 million as of December 31, 2017. The decrease was primarily related to the maturing, in January 2018, of $200.0 million of short-term U.S. Treasury securities.
Deposits
Deposits as of March 31, 2018 and December 31, 2017 were as follows:
March 31, 2018 |
December 31, 2017 |
Change |
||||||||||||||||||||||
(dollars in thousands) |
Balance |
Percent of Deposits |
Balance |
Percent of Deposits |
Amount |
Percent |
||||||||||||||||||
Interest-bearing demand |
$ | 529,478 | 16.0 |
% |
$ | 481,336 | 14.3 |
% |
$ | 48,142 | 10.0 |
% |
||||||||||||
Money market |
856,072 | 25.8 |
% |
862,639 | 25.6 |
% |
(6,567 |
) |
(0.8 |
) % |
||||||||||||||
Savings |
308,925 | 9.3 |
% |
338,572 | 10.0 |
% |
(29,647 |
) |
(8.8 |
) % |
||||||||||||||
Retail time deposits |
523,138 | 15.8 |
% |
532,202 | 15.8 |
% |
(9,064 |
) |
(1.7 |
) % |
||||||||||||||
Wholesale non-maturity deposits |
63,449 | 1.9 |
% |
62,276 | 1.8 |
% |
1,173 | 1.9 |
% |
|||||||||||||||
Wholesale time deposits |
171,359 | 5.2 |
% |
171,929 | 5.1 |
% |
(570 |
) |
(0.3 |
) % |
||||||||||||||
Interest-bearing deposits |
2,452,421 | 74.0 |
% |
2,448,954 | 72.6 |
% |
3,467 | 0.1 |
% |
|||||||||||||||
Non-interest-bearing deposits |
863,118 | 26.0 |
% |
924,844 | 27.4 |
% |
(61,726 |
) |
(6.7 |
) % |
||||||||||||||
Total deposits |
$ | 3,315,539 | 100.0 |
% |
$ | 3,373,798 | 100.0 |
% |
$ | (58,259 |
) |
(1.7 |
) % |
Borrowings
Borrowings as of March 31, 2018 and December 31, 2017 were as follows:
March 31, 2018 |
December 31, 2017 |
Change |
||||||||||||||||||||||
(dollars in thousands) |
Balance |
Percent of Borrowings |
Balance |
Percent of Borrowings |
Amount |
Percent |
||||||||||||||||||
Short-term borrowings |
$ | 173,704 | 43.3 |
% |
$ | 237,865 | 47.9 |
% |
$ | (64,161 |
) |
(27.0 |
) % |
|||||||||||
Long-term FHLB advances |
107,784 | 26.9 |
% |
139,140 | 28.0 |
% |
(31,356 |
) |
(22.5 |
) % |
||||||||||||||
Subordinated notes |
98,448 | 24.5 |
% |
98,416 | 19.8 |
% |
32 | 0.0 |
% |
|||||||||||||||
Junior subordinated debentures |
21,456 | 5.3 |
% |
21,416 | 4.3 |
% |
40 | 0.2 |
% |
|||||||||||||||
Total borrowed funds |
$ | 401,392 | 100.0 |
% |
$ | 496,837 | 100.0 |
% |
$ | (95,445 |
) |
(19.2 |
) % |
Capital
Consolidated shareholder’s equity of the Corporation was $533.1 million, or 12.4% of total assets as of March 31, 2018, as compared to $528.1 million, or 11.9% of total assets as of December 31, 2017. The following table presents the Corporation’s and Bank’s regulatory capital ratios and the minimum capital requirements to be considered “Well Capitalized” by regulators as of March 31, 2018 and December 31, 2017:
Actual |
Minimum to be Well Capitalized |
|||||||||||||||
(dollars in thousands) |
Amount |
Ratio |
Amount |
Ratio |
||||||||||||
March 31, 2018 |
||||||||||||||||
Total capital to risk weighted assets: |
||||||||||||||||
Corporation |
$ | 468,142 | 13.93 | % | $ | 336,154 | 10.00 | % | ||||||||
Bank |
$ | 397,077 | 11.82 | % | $ | 335,856 | 10.00 | % | ||||||||
Tier I capital to risk weighted assets: |
||||||||||||||||
Corporation |
$ | 351,781 | 10.46 | % | $ | 268,923 | 8.00 | % | ||||||||
Bank |
$ | 379,164 | 11.29 | % | $ | 268,685 | 8.00 | % | ||||||||
Common equity Tier I risk weighted assets: |
||||||||||||||||
Corporation |
$ | 331,009 | 9.85 | % | $ | 218,500 | 6.50 | % | ||||||||
Bank |
$ | 379,164 | 11.29 | % | $ | 218,307 | 6.50 | % | ||||||||
Tier I leverage ratio (Tier I capital to total quarterly average assets): |
||||||||||||||||
Corporation |
$ | 351,781 | 8.71 | % | $ | 202,050 | 5.00 | % | ||||||||
Bank |
$ | 379,164 | 9.39 | % | $ | 201,868 | 5.00 | % | ||||||||
Tangible common equity to tangible assets(1) |
||||||||||||||||
Corporation |
$ | 326,458 | 7.98 | % | — | — | ||||||||||
Bank |
$ | 376,038 | 9.19 | % | — | — | ||||||||||
December 31, 2017 |
||||||||||||||||
Total capital to risk weighted assets: |
||||||||||||||||
Corporation |
$ | 463,637 | 13.92 | % | $ | 333,068 | 10.00 | % | ||||||||
Bank |
$ | 387,067 | 11.65 | % | $ | 332,388 | 10.00 | % | ||||||||
Tier I capital to risk weighted assets: |
||||||||||||||||
Corporation |
$ | 347,187 | 10.42 | % | $ | 266,454 | 8.00 | % | ||||||||
Bank |
$ | 369,033 | 11.10 | % | $ | 265,910 | 8.00 | % | ||||||||
Common equity Tier I risk weighted assets: |
||||||||||||||||
Corporation |
$ | 328,676 | 9.87 | % | $ | 216,494 | 6.50 | % | ||||||||
Bank |
$ | 369,033 | 11.10 | % | $ | 216,052 | 6.50 | % | ||||||||
Tier I leverage ratio (Tier I capital to total quarterly average assets): |
||||||||||||||||
Corporation |
$ | 347,187 | 10.10 | % | $ | 171,915 | 5.00 | % | ||||||||
Bank |
$ | 369,033 | 10.76 | % | $ | 171,609 | 5.00 | % | ||||||||
Tangible common equity to tangible assets(1) |
||||||||||||||||
Corporation |
$ | 322,964 | 7.61 | % | — | — | ||||||||||
Bank |
$ | 367,457 | 8.67 | % | — | — |
(1) There is no official regulatory guideline for the tangible common equity to tangible asset ratio.
The capital ratios for the Bank and the Corporation, as of March 31, 2018, as shown in the above tables, indicate levels above the regulatory minimum to be considered “well capitalized.” Excluding the Bank’s and Corporation’s Tier I leverage ratio, all regulatory capital ratios increased from their December 31, 2017 levels primarily as a result of the increase in retained earnings. The Tier I leverage ratio, which is the ratio of Tier I capital to average quarterly assets, for both the Bank and Corporation decreased from December 31, 2017, as the average assets acquired in the December 15, 2017 RBPI Merger were present for a full quarter.
Liquidity
The Corporation’s liquidity position is managed on a daily basis as part of the daily settlement function and continuously as part of the formal asset liability management process. The Bank’s liquidity is maintained by managing its core deposits as the primary source, purchasing federal funds, selling loans in the secondary market, borrowing from the FHLB and the Federal Reserve Bank, and purchasing and issuing wholesale certificates of deposit as its secondary sources.
Unused availability is detailed on the following table:
(dollars in millions) |
Available Funds as of March 31, 2018 |
Percent of Total Borrowing Capacity |
Available Funds as of December 31, 2017 |
Percent of Total Borrowing Capacity |
Dollar Change |
Percent Change |
||||||||||||||||||
Federal Home Loan Bank of Pittsburgh |
$ | 1,404.7 | 84.0 |
% |
$ | 1,020.0 | 74.4 |
% |
$ | 384.7 | 37.7 |
% |
||||||||||||
Federal Reserve Bank of Philadelphia |
138.2 | 100.0 |
% |
121.3 | 100.0 |
% |
16.9 | 13.9 |
% |
|||||||||||||||
Fed Funds Lines (seven banks) |
79.0 | 100.0 |
% |
79.0 | 100.0 |
% |
— | — |
% |
|||||||||||||||
Total |
$ | 1,621.9 | 85.8 |
% |
$ | 1,220.3 | 77.6 |
% |
$ | 401.6 | 32.9 |
% |
Quarterly, the ALCO reviews the Corporation’s liquidity needs and reports its findings to the Corporation’s Board of Directors.
The Corporation has an agreement with IND to provide up to $40 million, excluding accrued interest, of money market and NOW funds at an agreed upon interest rate equal to the current Fed Funds rate plus 20 basis points. The Corporation had $31.7 million in balances as of March 31, 2018 under this program.
The Corporation continually evaluates the cost and mix of its retail and wholesale funding sources relative to earning assets and expected future earning-asset growth. The Corporation believes that with its current branch network, along with the available borrowing capacity at FHLB and other sources, it has sufficient capacity available to fund expected earning-asset growth.
Discussion of Segments
The Corporation has two principal segments as defined by FASB ASC 280, “Segment Reporting.” The segments are Banking and Wealth Management (see Note 22 in the accompanying Notes to Unaudited Consolidated Financial Statements).
The Wealth Management Segment recorded a pre-tax segment profit (“PTSP”) of $4.1 million for the three months ended March 31, 2018, as compared to PTSP of $3.7 million for the same period in 2017. The Wealth Management Segment provided 20.7% of the Corporation’s pre-tax profit for the three month period ended March 31, 2018, as compared to 26.9% for the same period in 2017. For the three month period ended March 31, 2018, both fees for wealth management services and insurance commissions increased from the same period in 2017.
The Banking Segment recorded a PTSP of $15.8 million for the three months ended March 31, 2018, as compared to PTSP of $10.0 million for the same period in 2017. The Banking Segment provided 79.3% of the Corporation’s pre-tax profit for the three month period ended March 31, 2018, as compared to 73.1% for the same period in 2017.
Off Balance Sheet Risk
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at March 31, 2018 were $766.4 million, as compared to $748.3 million at December 31, 2017.
Standby letters of credit are conditional commitments issued by the Bank to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in granting loan facilities to customers. The Bank’s obligation under standby letters of credit at March 31, 2018 amounted to $15.5 million, as compared to $17.0 million at December 31, 2017.
Estimated fair values of the Corporation’s off-balance sheet instruments are based on fees and rates currently charged to enter into similar loan agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Since fees and rates charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and the estimated fair value of off-balance sheet instruments.
Contractual Cash Obligations of the Corporation as of March 31, 2018:
(dollars in millions) |
Total |
Within |
2 - 3 |
4 - 5 |
After |
|||||||||||||||
Deposits without a stated maturity |
$ | 2,621.0 | $ | 2,621.0 | $ | — | $ | — | $ | — | ||||||||||
Wholesale and retail time deposit |
694.5 | 581.4 | 87.0 | 25.1 | 0.9 | |||||||||||||||
Short-term borrowings |
173.7 | 173.7 | — | — | — | |||||||||||||||
Long-term FHLB Advances |
107.8 | 52.5 | 40.4 | 14.9 | — | |||||||||||||||
Subordinated Notes |
100.0 | — | — | — | 100.0 | |||||||||||||||
Junior subordinated debentures |
25.8 | — | — | — | 25.8 | |||||||||||||||
Operating leases |
30.5 | 5.6 | 8.4 | 6.1 | 10.4 | |||||||||||||||
Purchase obligations |
5.1 | 3.4 | 1.7 | — | — | |||||||||||||||
Total |
$ | 3,758.4 | $ | 3,437.6 | $ | 137.5 | $ | 46.1 | $ | 137.1 |
Other Information
Effects of Inflation
Inflation has some impact on the Corporation’s operating costs. Unlike many industrial companies, however, substantially all of the Corporation’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Corporation’s performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services.
Effects of Government Monetary Policies
The earnings of the Corporation are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve Board is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect rates charged on loans or paid for deposits.
The Corporation is a member of the Federal Reserve System and, therefore, the policies and regulations of the Federal Reserve Board have a significant effect on its deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Corporation’s operations in the future. The effect of such policies and regulations upon the future business and earnings of the Corporation cannot be predicted.
Special Cautionary Notice Regarding Forward Looking Statements
Certain of the statements contained in this report and the documents incorporated by reference herein may constitute forward-looking statements for the purposes of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended. As such, they are only predictions and may involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Bryn Mawr Bank Corporation (the “Corporation”) to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements include statements with respect to the Corporation’s financial goals, business plans, business prospects, credit quality, credit risk, reserve adequacy, liquidity, origination and sale of residential mortgage loans, mortgage servicing rights, the effect of changes in accounting standards, and market and pricing trends loss. The words “may,” “would,” “could,” “will,” “likely,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “forecast,” “project,” “believe,” and similar expressions are intended to identify such forward-looking statements. The Corporation’s actual results may differ materially from the results anticipated by the forward-looking statements due to a variety of factors, including without limitation:
• |
local, regional, national and international economic conditions, their impact on us and our customers, and our ability to assess those impacts; |
• |
sources of liquidity and financial resources in the amounts, at the times, and on the terms required to support our future business; |
• |
changes in policy, laws or existing statutes, regulatory guidance, legislation or judicial decisions that affect our the financial services industry as a whole, the Corporation, or our subsidiaries individually or collectively; |
• |
results of examinations by the Federal Reserve Board of the Corporation or its subsidiaries, including the possibility that such regulator may, among other things, require us to increase our allowance for loan losses or to write down assets, or restrict our ability to: engage in new products or services; engage in future mergers or acquisitions; open new branches; pay future dividends; or otherwise take action, or refrain from taking action, in order to correct activities or practices that the Federal Reserve believes may violate applicable law or constitute an unsafe or unsound banking practice; |
• |
effectiveness of our capital management strategies and activities; |
• |
changes in accounting requirements or interpretations; |
• |
the accuracy of assumptions underlying the provisions for loan and lease losses and estimates in the value of collateral, and various financial assets and liabilities; |
• |
estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; |
• |
changes in interest rates, spreads on interest-earning assets and interest-bearing liabilities, and interest rate sensitivity; |
• |
changes in relationships with employees, customers, and/or suppliers; |
• |
our success in continuing to generate new business in our existing markets, as well as identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time; |
• |
changes in consumer and business spending, borrowing and savings habits, and demand for financial services in the relevant market areas; |
• |
rapid technological developments and changes; |
• |
competitive pressure and practices of other commercial banks, thrifts, mortgage companies, finance companies, credit unions, securities brokerage firms, insurance companies, money-market and mutual funds and other institutions operating in our market areas and elsewhere, including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet; |
• |
risks related to our mergers and acquisitions, including, but not limited to: reputational risks, client and customer retention risks; diversion of management time on integration-related issues; risk that integration may take longer than anticipated or cost more than expected; risk that the anticipated benefits of the merger or acquisition, including any anticipated cost savings or strategic gains, may take longer or be significantly harder to achieve or may fail to be achieved; |
• |
our ability to contain costs and expenses; |
• |
protection and validity of intellectual property rights; |
• |
reliance on large customers; |
• |
the outcome of pending and future litigation and governmental proceedings; |
• |
any extraordinary events (such as natural disasters, acts of terrorism, wars or political conflicts); |
• |
ability to retain key employees and members of senior management; |
• |
the ability of key third-party providers to perform their obligations to us and our subsidiaries; |
• |
other material adverse changes in operations or earnings; and |
• |
our success in managing the risks involved in the foregoing. |
All written or oral forward-looking statements attributed to the Corporation are expressly qualified in their entirety by the factors, risks, and uncertainties set forth in the foregoing cautionary statements, along with those set forth under the caption titled “Risk Factors” beginning on page 11 of this Report. All forward-looking statements included in this Report and the documents incorporated by reference herein are based upon the Corporation’s beliefs and assumptions as of the date of this Report. The Corporation assumes no obligation to update any forward-looking statement, whether the result of new information, future events, uncertainties or otherwise, as of any future date. In light of these risks, uncertainties and assumptions, you should not put undue reliance on any forward-looking statements discussed in this Report or incorporated documents.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks
See the discussion of quantitative and qualitative disclosures about market risks in the Corporation’s 2017 Annual Report, as updated by the disclosure in “Management’s Discussion and Analysis of Results of Operations – Interest Rate Sensitivity,” “– Summary of Interest Rate Simulation,” “Customer Derivatives” and “– Gap Analysis” in this quarterly report on Form 10-Q.
ITEM 4. Controls and Procedures
As of the end of the period covered by this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer, Francis J. Leto, and Chief Financial Officer, Michael W. Harrington, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of March 31, 2018.
There were no changes in the Corporation’s internal controls over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
The information required by this Item is set forth in the “Legal Matters” discussion in Note 21 “Contingencies” in the Notes to Unaudited Consolidated Financial Statements in Part I Item I of this Form 10-Q, which is incorporated herein by reference in response to this Item.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchase
The following table presents the shares repurchased by the Corporation during the first quarter of 2018:
Period |
Total Number of |
Average Price Paid |
Total Number of as Part of Publicly |
Maximum |
||||||||||||
January 1, 2018 – January 31, 2018 |
— | $ | — | — | 189,300 | |||||||||||
February 1, 2018 – February 28, 2018 |
16,635 | $ | 44.26 | — | 189,300 | |||||||||||
March 1, 2018 – March 31, 2018 |
712 | $ | 44.36 | — | 189,300 | |||||||||||
Total |
17,347 | $ | 44.27 | — | 189,300 |
(1) |
On March 30, 2018, 437 shares were purchased by the Corporation’s deferred compensation plans through open market transactions. |
(2) |
Includes shares purchased to cover statutory tax withholding requirements on vested stock awards for certain officers of the Corporation or Bank as follows: 13,835 shares on February 9, 2018; and 275 shares on March 2, 2018. |
(3) |
On August 6, 2015, the Corporation announced a stock repurchase program (the “2015 Program”) under which the Corporation may repurchase up to 1,200,000 shares of the Corporation’s common stock, at an aggregate purchase price not to exceed $40 million. There is no expiration date on the 2015 Program and the Corporation has no plans for an early termination of the 2015 Program. All share repurchases under the 2015 Program were accomplished in open market transactions. As of March 31, 2018, the maximum number of shares remaining authorized for repurchase under the 2015 Program was 189,300. |
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures.
Not applicable.
None.
Exhibit No. |
Description and References |
|
3.1 |
||
3.2 |
||
31.1 |
||
31.2 |
||
32.1 |
||
32.2 |
||
101.INS XBRL |
Instance Document, filed herewith |
|
101.SCH XBRL |
Taxonomy Extension Schema Document, filed herewith |
|
101.CAL XBRL |
Taxonomy Extension Calculation Linkbase Document, filed herewith |
|
101.DEF XBRL |
Taxonomy Extension Definition Linkbase Document, filed herewith |
|
101.LAB XBRL |
Taxonomy Extension Label Linkbase Document, filed herewith |
|
101.PRE XBRL |
Taxonomy Extension Presentation Linkbase Document, filed herewith |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
Bryn Mawr Bank Corporation |
||
Date: May 4, 2018 |
|
By: |
/s/ Francis J. Leto |
|
|
|
|
|
Francis J. Leto |
|
|
|
|
President & Chief Executive Officer |
(Principal Executive Officer) |
||||
Date: May 4, 2018 |
|
By: |
/s/ Michael W. Harrington |
|
|
|
|
|
Michael W. Harrington |
|
|
|
|
Chief Financial Officer |
(Principal Financial Officer) |
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